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THE  LIBRARY 

OF 

THE  UNIVERSITY 
OF  CALIFORNIA 

LOS  ANGELES 


SOUTHERN 

UNIVERSITY  OF  CALIFORNIA, 
LIBRARY, 

ANGELES,  CALIF. 


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Angles  24,  California 


Rowe's 
Bookkeeping  and  Accountancy 

Advanced  Text 

For  Merchants  Corporation  and  Cost  Accountancy 
for  Manufacturing  Sets 

By  HARRY  M.  ROWE,  Ph.D. 


COPYRIGHTS  1910  AND  1911 

BY 

HARRY  M.  HOWE 
ENTERED  IN  STATIONER'S  HALL,  LONDON,  1910  AND  1911 


43265 


BALTIMORE 
THE  H.  M.  ROWE  COMPANY 

EDUCATIONAL  PUBLISHERS 


COPYRIGHT  1910 
COPYRIGHT  1911 

BY 
HARRY  M.  Rows 

ENTERED  IN  STATIONERS'  HALL 

LONDON,  1910 
ENTERED  IN  STATIONERS'  HALL 

LONDON,  1911 
BY  HARRY  M.  Rows 


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etc.  Infringers  will  be  punished  to  the  full  extent 
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Bus.  Admin. 
Library 


CORPORATIONS. 


ft  79  b(T 


617.  A  Corporation  was  defined  by  Chief  Justice  Marshall  as  "  an  artificial 
being,  invisible,  intangible,  and  existing  only  in  contemplation  of  law."     It  is 
sometimes  termed  an  "artificial  person." 

617a.  Corporations  are  necessary  to  provide  a  convenient  means  of  combining 
the  funds  which  a  number  of  individuals  may  have  for  investment,  in  order  to 
supply  the  capital  required  to  conduct  and  carry  on  large  commercial  and  indus- 
trial enterprises  without  requiring  those  who  contribute  this  capital,  whether  in 
large  or  in  small  amounts,  to  assume  the  responsibilities  and  liabilities  of  the 
ordinary  partner;  consequently,  laws  have  been  enacted^  by  the  legislatures  of 
the  different  states  creating  for  corporations  a  separate  legal  existence,  and  extend- 
ing to  stockholders  certain  privileges  and  exemptions  from  liability,  and  other 
advantages  which  cannot  be  secured  in  the  ordinary  partnership  relation.  Cor- 
porations, as  a  rule,  may  be  formed  for  any  legitimate  purpose. 

6176.  Corporations  are  created  in  two  ways,  by  charter  and  by  general  statute. 
When  created  by  charter,  a  special  act  must  be  passed  for  each  -corporation,  which  is 
known  as  its  charter.  This  charter  defines  its  powers  and  privileges.  When  cre- 
ated by  general  statute,  all  that  is  necessary  is  to  comply  with  the  provisions  of 
the  statute,  which  defines  its  powers  and  privileges.  Nearly  all  corporations  are 
now  created  by  general  statute,  and  very  few  by  special  charter. 

617c.  The  method  of  procedure  in  forming  a  corporation  by  general  statute  is 
very  simple.  The  required  number  of  individuals  (not  less  than  two  and  usually 
not  less  than  five)  join  in  a  written  instrument  known  as  "Articles  of  Incorpora- 
tion," which,  when  properly  acknowledged  before  some  competent  officer,  is  sub- 
mitted to  the  judge  of  a  court  for  his  examination  as  to  whether  or  not  it  conforms 
with  the  law  creating  it,  and  when  properly  approved  and  certified  by  him  it 
becomes  a  certificate  of  incorporation,  the  act  under  which  the  corporation  is 
formed  being  its  charter.  After  this  certificate  is  properly  recorded  the  corpora- 
tion is  formed,  and  when  by-laws  are  adopted  and  the  board  of  directors  and 
officers  are  elected  the  corporation  is  ready  to  proceed  in  conducting  the  business 
for  which  it  was  created. 

Nora — The  legal  part  of  the  formation  of  a  corporation  should  invariably  be  entrusted  to 
an  attorney. 

618.  Terms  and  definitions.     There  are  certain  terms  and  definitions  used 
in  connection  with  corporations  with  which  you  should  be  familiar.     Some  of 
them  are  here  described. 

619.  The  capital  stock  is  the  amount  of  stock  authorized  by  the  charter 
or  certificate   of  incorporation,   at  its  par  value.     The  paid-in  capital  is  the 
amount  paid  on  the  subscribed  shares  of  stock  by  the  stockholders. 

103 


194  BOOKKEEPING  AND   ACCOUNTANCY 

620.  Treasury  stock  is  stock  of  a  corporation  which  has  been  previously 
issued  to  stockholders,  and  is  later  purchased  from  the  funds  of  the  corpora- 
tion or  is  secured  by  donation  or  gift.     Unissued  shares  of  the  authorized  capital 
stock  must  not  be  considered  as    treasury  stock.     Treasury  stock   does  not 
participate  in  dividends.     "Treasury  stock  is  the  stock  of  a  company  issued  as 
fully  paid,  which  subsequently  comes  back  to  the  company:  (a)  as  settlement 
of  an  account  due  the  company;  (6)  as  a  purchase  by  the  company;  or  (c)  as  stock 
donated  for  working  capital." 

621.  The  stockholders  of  a  corporation  are  the  individuals  who  own  the 
property  of  the  corporation,  e-ach  stockholder's  interest  being  measured  by  the 
number  and  value  of  the  shares  he  holds. 

621a.  A  stock  certificate  is  a  document  issued  by  the  corporation  to  each 
stockholder,  certifying  that  he  is  the  owner  of  a  certain  specified  number  of  shares 
of  the  capital  stock  of  a  specified  par  value. 

622.  The  board  of  directors  is  elected  by  the  stockholders  and  represents 
them.     It  is  vested  with  the  management  and  direction  of  all  the  affairs  of  th^ 
corporation  through  its  officers,  who  are  generally  elected  from  among  its  own 
number.     These  officers  are  usually  a  president,  vice-president,  secretary,  and 
treasurer,  whose  duties  are  defined  in  the  by-laws. 

623.  The  president  is  the  chief  executive  officer,  who  presides  at  the  meet- 
ings of  the  board  and  ordinarily  exercises  the  authority  of  the  board  when  it  is 
not  in  session. 

624.  The  secretary  keeps  the  official  records  of  the  corporation.     He  is 
custodian  of  and  is  responsible  for  the  charter  and  seal  of  the  corporation,  and 
for  the  minute  book  and  the  various  other  books  containing  the  records  relating 
to  the  stockholders  of  the  corporation.     The  most  important  of  these  books  are : 

(a)  The  minute  book,  in  which  is  recorded  the  proceedings  of  all  the  meetings  of  the  stock- 
holders and  of  the  board  of  directors.    This  record  should  be  most  complete,  as  the  officers  must 
look  to  it  for  the  necessary  authority  to  conduct  the  affairs  of  their  respective  offices,  and  in 
case  of  litigation  it  is  taken  as  prima  facie  evidence  for  the  acts  of  the  board  of  directors  and 
officers.     It  should  contain  the  by-laws  of  the  corporation,  and  the  minutes  of  each  meeting 
should  be  signed  by  the  secretary  and  also  by  the  president. 

(b)  The  stock  certificate  book  is  a  book  of  printed  certificates,  with  stubs,  which  are  filled 
<mt  and  issued  to  the  stockholders. 


DIFFERENCES   BETWEEN   PARTNERSHIPS  AND   CORPORATIONS  195 

(c)  The  transfer  book,  or  journal,  receives  entries  for  all  transfers  of  stock  from  one  stock- 
holder to  another  and  from  it  the  proper  entries  are  made  in  the  different  accounts  in  the  stock 
ledger.    Entries  for  the  original  certificates  issued  may  be  entered  in  this  book  also,  and  posted 
from  it  to  the  stock  ledger.    When  this  is  done,  the  amount  of  the  original  stock  issued  should 
be  charged  to  "Capital  Stock  Issued"  account  in  the  stock  ledger,  which  would  then  show  a 
debit  balance  equal  to  the  credit  balance  shown  by  the  capital  stock  account  in  the  general 
ledger,  as  well  as  the  sum  of  the  credits  to  the  various  stockholders'  accounts  in  the  stock  ledger, 
thus  making  the  stock  ledger  self-balancing. 

(d)  The  stock  ledger  contains  the  accounts  with  the  different  stockholders,  and  shows  the 
number  and  the  par  value  of  the  shares  of  stock  owned  by  each.     It  is  a  subordinate  ledger,  of 
wKich  tho  capital  stock  account  in  the  general  ledger  is  the  controlling  account.     It  receives 
its  entries  from  the  stock  certificate  book  and  from  the  transfer  book.     From  the  stock  book, 
each  stockholder  is  credited  for  the  number  of  shares  and  the  par  value  of  the  stock  issued  to 
him.    From  the  transfer  book,  he  is  debited  for  the  number  of  shares  and  the  par  value  of  stock 
transferred  by  him  toothers.    The  balance  shown  by  each  account  is  the  par  value  of  the 
stock  owned  by  the  stockholder. 

(e)  The  dividend  book  is  kept  to  show  the  dividends  declared  and  paid  to  each  stockholder. 
A  dividend  is  a  certain  percentage  declared  on  the  capital  stock  to  be  paid  from  the  surplus 
earnings  of  the  company. 

625-  The  treasurer  is  the  financial  officer  of  the  corporation.  He  is  usually 
the  custodian  of  and  is  responsible  for  all  the  funds  of  the  corporation.  The  ordi- 
nary books  of  account  in  which  is  recorded  the  gsneral  business  of  the  company 
are  kepi  in  his  office.  It  should  be  remembered  that  the  books  of  the  secretary 
and  those  of  the  treasurer  are  distinct  and  separate,  although  the  duties  of  one, 
either  in  whole  or  in  part,  may  be  and  frequently  are  performed  by  the  other,  to 
suit  the  requirements  of  a  particular  business  or  as  required  by  the  board  of 
directors  or  by  the  by-laws. 

SOME  DIFFERENCES  BETWEEN  PARTNERSHIPS  AND  CORPORATIONS. 

626.  Formation.     A  partnership  is  an  association  of  two  or  more  persons 
for  the  purpose  of  conducting  a  business  and  sharing  in  the  profits  and  losses 
accruing,  with  all  the  powers  and  privileges  under  the  law  that  each  partner 
enjoys  as  an  individual.     A  corporation  is  an  association  of  individuals  authorized 
by  law  to  act  as  a  single  person,  with  powers  and  privileges  restricted  to  those 
definitely  set  forth  in  its  special  charter  or  in  the  general  corporation  statute 
(act)  under  which  it  is  formed. 

627.  How  formed.     A  partnership  is  formed  by  an  agreement   (either 
written  or  verbal)  between  two  or  more  persons  to  contribute  capital,  ability  or 
service,  or  all  of  them,  for  a  certain  purpose,  and  the  associated  partners  are 
known  as  &firm.     A  corporation  is  formed  by  the  association  of  two  or  more  per- 


196  BOOKKEEPING  AND  ACCOUNTANCY 

sons  under  a  special  charter  or  under  a  certificate  of  incorporation  issued  by  some 
officer  of  the  state,  in  accordance  with  the  general  or  special  law  under  which  it  is 
created,  and  is  usually  designated  as  a  company. 

628.  Liability.  In  a  partnership  each  partner  is  liable  for  att  the  debts  of 
the  firm.  In  a  corporation  each  stockholder  is  liable  only  for  such  an  amount  as 
is  defined  by  law,  which  is  usually  the  amount  of  his  stock,  but  always  in  propor- 
tion to  his  share  in  the  capital  stock  of  the  corporation. 

629,.  Continuation.  A  partnership  continues  until  the  expiration  of  the 
time  agreed  upon  for  dissolution  or  until  the  death  or  legal  disability  of  one  of 
the  partners.  A  corporation  continues  until  the  expiration  of  its  charter,  which 
may  be  perpetual.  The  death  or  disability  of  a  stockholder  does  not  affect  a 
corporation. 

630.  Powers.    A  partnership   has  no   restrictions  that  the  individuals 
composing  it  do  not  have,  and  it  may  engage  in  any  line  of  business  so  long  as  it  is 
legal.     A  corporation  is  restricted  to  the  performance  of  only  such  acts  as  are  nec- 
essary to  conduct  the  particular  business  or  accomplish  the  particular  purpose  for 
which  it  was  created. 

631.  By  whom  conducted.    The  affairs  of  a  partnership  are  conducted  by 
the  members  of  the  firm,  or  such  of  them  or  their  agents  as  are  so  authorized  by 
the  agreement  between  the  partners.     The  affairs  of  a  corporation  are  transacted 
only  through  the  officers  elected  by  the  stockholders,  or  their  legal  representatives, 
as  authorized  and  defined  by  the  charter  and  by-laws,  who  act  as  agents  of  the 
corporation. 

CORPORATION  ACCOUNTS. 

632.  The  accounts  of  a  corporation  are  in  no  way  different  from  those  of  a 
firm  or  an  individual  proprietor  in  so  far  as  they  relate  to  the  routine  transactions 
of  the  business  conducted,  but  there  are  a  number  of  accounts  necessitated  by  the 
requiremencs  of  corporate  ownership  which  are  found  only  in  connection  with 
corporation  accounting  and  are  not  found  elsewhere.     These  accounts  relate  to 
the  investments  of  the  stockholders  and  the  distribution  of  profits. 

633.  Capital  stock  account.    This  account,  in  a  way,  corresponds  with  the 
capital  account  of  a  proprietor  or  partner,  since  it  is  an  ownership  account  (read 
^[55,  586),  and  shows  the  par  value  of  the  stock  owned  by  the  stockholders; 
but  it  is  not  affected  by  the  gains  or  losses  of  the  business,  which  are  shown  in 
undivided  profits,  surplus*  and  other  similar  accounts,  nor  by  the  purchase  and 
•ale  of  the  stock  between  the  stockholders. 


CORPORATION  ACCOUNTS  197 

Paragraph  663 — Continued. 

a.  It  is  credited  for  the  par  value  of  the  stock  issued,  up  to  the  amount  of  the  authorized 
stock. 

6.  It  is  debited,  when  the  capital  stock  is  reduced,  for  the  amount  of  shares  retired  and 
canceled,  at  their  par  value. 

c.  The  balance  shows  the  amount  of  stock  of  the  corporation,  at  its  par  value,  in  the  hands 
of  its  stockholders,  and  it  should  equal  the  sum  of  the  balances  shown  by  the  accounts  with  the 
different  stockholders  in  the  stock  ledger.  If  treasury  stock  is  held,  its  par  value  must  be  added 
to  the  sum  of  the  balances  in  the  stock  ledger  to  equal  the  balance  of  the  capital  stock  account. 
Capital  stock  represents  a  secondary  liability  of  the  corporation. 

NOTE — It  should  be  credited  only  for  the  actual  stock  issued,  and  not  for  the  total  author- 
ized capital  stock  unless  all  of  it  has  been  issued. 

634.  Treasury  stock  account.    This  account  shows  the  amount  of  the  capi- 
tal stock  of  the  corporation  previously  issued  to  stockholders,  which  has  been 
secured  from  them  by  purchase,  gift  or  donation. 

a.  It  is  debited  for  the  cost  of  all  treasury  stock  purchased  by  the  corporation  or  for  the 
market  value  of  stock  received  by  gift  or  donation. 

&.  It  is  credited  when  treasury  stock  is  disposed  of,  for  the  cost  of  the  stock  if  purchased 
or  for  the  market  value  of  the  stock  if  received  by  gift  or  donation.  If  sold  for  more  or  less  than 
the  price  charged  in  the  account,  surplus  account  should  be  debited  or  credited  for  the  differ- 
ence between  that  price  and  the  selling  price.  If  the  stock  is  retired  and  canceled,  credit  the 
account  for  the  amount  for  which  it  was  debited  when  the  stock  was  received,  and  debit  or 
credit  surplus  account  with  the  difference  between  that  amount  and  the  par  value  of  the  stock 
retired,  debiting  capital  stock  account  for  the  par  value  of  the  stock  retired  ami  canceled. 

c.  The  balance  shows  either  the  cost  or  the  market  value  of  the  treasury  stock  on  hand, 
which  is  a  resource. 

NOTE — Treasury  stock  does  not  participate  in  dividends  declared,  and  in  many  states  the 
purchase  of  its  own  stock  by  corporations,  as  treasury  stock  or  otherwise,  is  forbidden. 

635.  Subscription  Account.     This  account  is  opened  to  show  the  par  value 
of  stock  which  has  been  subscribed  but  not  issued.     It  is  credited  at  par  value  for 
the  amount  of  stock  subscribed  and  not  issued  at  that  time;  it  is  debited  for  such 
stock  when  finally  issued.     The  balance,  if  any,  shows  the  par  value  of  stock 
subscribed  but  not  issued. 

636.  Reserve,  surplus  and  undivided  profits  accounts.     (Read  ^[557  to  557d 
inclusive,  page  167.) 


198  BOOKKEEPING  AND  ACCOUNTANCY 

ACCOUNTS  DEBITED  AND  CREDITED  IN  CONNECTION  WITH  TRANSACTIONS 
RELATING  TO  THE  STOCKHOLDERS  OF  A  CORPORATION. 

637.  In  disposing  of  the  transactions  relating  to  stockholders  in  the  bcoks 
of  a  corporation,  the  names  of  the  accounts  to  be  debited  and  credited  are  given, 
following  each  proposition  stated : 

a.  Where  stock  is  subscribed  and  immediately  paid  for: 

Cash,  Dr.  For  par  value  of  the  stock  sold. 

Capital  Stock,  Cr. 

b.  Where  stock  is  subscribed  and  not  all  paid  for  at  one  time: 

Subscriber,  Dr.  For  total  amount  of  stock  subscribed,  at  par 

Subscription  %,  Cr.  value. 

c.  When  part  of  the  subscription  price  is  paid  when  stock  is  subscribed,  or  when  part  is 
paid  later: 

Cash,  Dr.  For  the  amount  paid  in  cash  or  otherwise. 

To  Subscriber,  Cr. 

d.  When  subscribed  stock  has  been  paid  for  in  full  and  the  stock  issued : 
Subscription  %,  Dr.  For  the  amount  of  stock  issued,  at  par  value. 

Capital  Stock  %,  Cr. 

e.  When  stock  is  subscribed  and  payment  made  by  cash,  notes  and  property  i.e.,  if  A,  B, 
and  C  each  subscribed  for  twenty  shares  of  D  Company  stock,  par  value  $2000 — A  pays  cash, 
B  pays  half  cash  and  the  balance  by  note  at  thirty  days,  and  C  deeds  to  the  company  land 
appraised  at  $2000: 

Cash,  Dr $2000  For  amount  of  stock  issued  and  paid  for,  at 

Capital  Stock,  Cr $2000  par  value,  by  A. 

Cash,  Dr 1000  For  amount  of  stock  issued  and  paid  for, 

Notes  Rec.,  Dr 1000  at  par  value,  by  B — one-half  cash  and  one- 
Capital  Stock,  Cr 2000               half  note. 

Land,  or  Real  Estate,  or  Cost 

of  Property,  Dr 2000  For  amount  of  stock  issued  and   paid  for, 

Capital  Stock,  Cr 2000  at  par  value,  by  C,  in  land. 

In  like  manner,  if  the  stock  was  paid  for  by  a  patent  right,  machinery,  services  or  other 
value,  a  corresponding  account,  under  an  appropriate  title,  that  would  clearly  set  forth  the 
nature  of  the  transaction  should  be  debited,  such  as  " Patent  Rights"  %,  "Machinery"  %, 
"Cost  of  Property"  %.  etc. 

/.  E,  F,  and  G  are  partners.  They  decide  to  incorporate  their  business,  each  taking  stock 
for  his  interest  in  the  old  concern.  If  the  business  is  to  be  recorded  in  the  old  books,  the  entry 
to  adjust  is: 

E,  Dr.  Each  for  the  amount  of  his  net  capital  in  the 

F,  Dr.  firm,  for  which  he  has  received  stock  in  the 

G,  Dr.  new  company  at  par. 

Capital  S\  ock,  Cr. 


CORPORATION   ACCOUNTS  199 

If  they  desire  to  open  a  new  set  of  books,  the  accounts  shown  by  the  statement  of  resources 
and  liabilities  would  be  debited  and  credited  for  the  amounts  shown  therein,  in  connection 
with  the  entry  shown  above. 

If  stock  was  sold  to  additional  stockholders,  the  entry  would  in  every  way  be  similar  to 
those  given  in  previous  examples  under  like  conditions. 

g.  H  and  I  are  partners,  each  with  a  net  capital  of  $25,000  shown  in  their  capital  accounts. 
They  decide  to  incorporate  with  a  capital  stock  of  $100,000,  of  which  they  are  to  receive  $75,000 
par  value  in  payment  of  their  interest  in  the  former  business,  represented  by  their  capital 
stock,  the  $25,000  being  for  good-will.  The  remaining  $25,000  was  disposed  of  to  outsiders,  at 
par  value.  The  entry  to  adjust  is: 

H,  Cap.  %,  Dr $25,000  To  close  capital  % 

I,  Cap.  %,  Dr 25,000  To  close  capital  % 

Good-will,  Dr 25,000  To  open 

Cash,  Dr 25,000  To  transfer  to  new  books 

Capital  Stock,  Cr $100,000 

"Cost  of  Property"  is  a  term  that  is  used  to  designate  the  difference  between  the  current 
assets  and  liabilities  of  a  business  or  property  purchased  and  the  purchase  price.  Oftentimes, 
when  it  is  desired  to  state  the  assets  purchased,  at  their  cost,  on  the  books  of  the  company,  it 
is  necessary  to  set  up  an  account  called  "Reserve  for  Capital  Investment."  This  reserve  is 
sometimes  referred  to  as  "Capital  Reserve." 

h.  Where  both  common  and  preferred  stock  are  issued  to  stockholders,  their  sum  equals 
the  capital  stock  of  the  company,  although  separate  accounts  are  opened  for  each;  for  instance, 
in  example  g,  if  the  capital  stock  of  $100,000  was  divided  into  $50,000  preferred  stock,  $50,000 
of  common  stock,  instead  of  capital  stock  being  credited,  preferred  stock  would  be  credited 
$50,000,  and  common  stock  $50,000. 

f .  When  stock  is  sold  at  a  discount,  i.e.,  if  J  and  K  purchase  ten  shares  of  stock,  par  value 
$100,  at  $75  per  share,  if  the  shares  are  paid  for  in  cash  the  entry  is: 

Cash,  Dr $1500 

Discount  on  Stock  Sold,  Dr 500 

Capital  Stock,  Cr $2000 

j.     In  the  above  transaction,  if  one-half  is  to  be  paid  in  cash,  the  entry  is: 

J,  Dr $750 

K,  Dr 750 

Discount  on  Stock  Sold,  Dr 500 

Subscription  %,  Cr $2000 

As  the  stock  is  paid  for,  "Cash"  is  debited  and  J  and  K  credited.     When  each  has  paid 
$750  for  the  stock  and  it  is  issued,  the  entry  to  adjust  is: 
Subscription  %,  Dr $2000  For  the  par  value  of  the  stock  issued. 

Capital  Stock,  Cr $2000 

NOTE — The  preceding  examples  illustrate  the  simpler  entries  required  in  opening  the  stock- 
holders' accounts  of  a  corporation.  In  these  days  of  holding  companies,  subsidiary  companies, 
and  the  many  other  combinations  in  corporate  ownership,  there  are  many  conditions  contin- 
ually arising  which  require  special  treatment  at  the  hands  of  the  accountant.  This,  therefore, 
is  a  subject  which  properly  belongs  to  the  most  advanced  part  of  higher  accounting  work 
and,  consequently,  is  omitted  in  this  text. 


200  BOOKKEEPING  AN)>  ACCOUNTANCY 


MANUFACTURING  ACCOUNTS. 

638.  Commercial  and  industrial  pursuits  may  be  divided  into  two  classes : 
those  of  traders  or  distributors,  who  are  known  as  merchants,  and  those  of  makers 
or  producers,  who  are  known  as  manufacturers. 

639.  The  merchant  buys  and  sells;  the  manufacturer  makes  and  sells,  i.e., 
the  merchant  buys  and  sells  the  finished  product,  while  the  manufacturer  buys 
the  materials  and  hires  the  labor  to  turn  these  materials  into  the  finished  product 
which  he  sells  to  the  merchant.     Sometimes  the  manufacturer  acts  as  his  own 
merchant  or  distributor  by  selling  his  product  directly  to  the  user  or  the  consumer, 
just  as  occasionally  the  merchant  may  manufacture  some  part  of  that  which  he 
sells. 

640.  Just  as  the  principal  profit  of  a  mercantile  or  trading  business  is  derived 
from  the  purchase  and  sale  of  commodities  and  is  ascertained  from  that  group  of 
accounts  known  as  trading  accounts,  so,  in  like  manner,  the  principal  profit  of  a 
manufacturing  or  industrial  business  is  derived  from  the  manufacture  and  sale 
of  commodities,  the  cost  of  manufacture  being  ascertained  from  that  group  of 
accounts  known   as  manufacturing  accounts.     The  cost  of  finished  goods  sold 
in  a  manufacturing  business  corresponds  with  the  "  cost  of  merchandise  sold"  in  a 
trading  business,  the  only  difference  being  that  in  one  case  the  concern  makes  the 
goods  and  in  the  other  it  buys  them  already  made.     Similarly,  the  gross  trading 
profit  shown  by  the  trading  accounts  of  a  merchant  corresponds  with  the  gross 
profit  from  sales  shown  by  the  accounts  of  a  manufacturing  concern. 

641.  While  there  are  marked  similarities  between  trading  and  manufac- 
turing accounts,  as  indicated  in  the  preceding  paragraph,  they  differ  in  some  im- 
portant respects  owing  to  the  great  difference  in  the  elements  of  cost  entering 
into  the  manufacture  of  goods  and  the  corresponding  difference  in  the  units  of 
information  desired.     While  the  accounts  of  a  small  factory  may  be  very  simple, 
in  large  establishments,  where  every  detail  of  cost  and  expense  must  be  shown, 
elaborate  systems  must  be  installed  which  exemplify  the  highest  expressions  of 
scientific  accountancy,  and  for  that  reason  manufacturing  accounts,  cost  systems, 
etc.,  are  of  special  interest. 

ELEMENTS  OF  COST. 

642.  There  are  three  principal  elements  of  cost  in  manufacturing,  namely : 
the  cost  of  materials,  the  cost  of  labor,  and  the  cost  of  manufacturing  expenses. 
The  items  showing  these  costs  are  entered  into  corresponding  accounts  known  as 
material  accounts,  labor  accounts,  and  factory  expense  accounts.    The  items 


ELEMENTS  OF  COST  201 

entering  into  each  of  these  accounts  may  be  further  classified  in  separate  accounts 
to  any  extent  desired,  in  a  manner  similar  to  the  classification  of  items  in  the  prin- 
cipal and  subsidiary  accounts  of  a  trading  business.  (Read  If  134  to  139) 

643.  Materials.    In  a  manufacturing  sense,  material  is  that  of  which  any- 
thing is  made.     Raw  material  is  material  in  its  natural  state,  or  nearly  so,  such 
as  coal,  cotton  or  wool.     Many  materials  pass  through  several  stages  of  manu- 
facture before  they  reach  their  final  form  in  the  finished  product;  for  instance, 
iron  ore  is  converted  into  metal  by  one  process,  into  steel  by  another,  and  into 
its  final  form  by  a  third  and,  not  infrequently,  by  a  fourth  or  fifth  operation.    Con- 
sequently, the  finished  product  of  one  concern  or  factory  or  department  may 
become  the  material  of  another;  for  instance,  the  finished  product  of  the  pig  iron 
manufacturer  becomes  the  material  of  the  steel  manufacturer,  and  his  finished 
product,  in  turn,  becomes  the  material  of  the  engine  builder  or  the  tool  maker,  etc. 

644.  Labor.    This  is  a  most  important  element  entering  into  the  cost  of  manu- 
facture.    It  represents  the  cost  of  converting  the  material  into  the  finished  prod- 
uct, whether  the  labor  is  expended  directly  upon  the  material,  in  the  operation 
of  machines,  or  in  other  ways  connected  with  the  processes  of  manufacture. 

645.  Factory  expenses,  or  "shop,"  or  "manufacturing,"  expenses,  as  they 
are  variously  designated,  include  the  cost  of  superintendence,  incidental  labor, 
supplies,  rent,  fuel  and  light,  power,  taxes  on  plant,  insurance  on  plant,  mainte- 
nance,  repairs,   renewals,   depreciation,  and  such  other  items  as  enter  into  the 
cost  of  production.      These  expenses  are,  in  a  general  way,  similar  to  the  general 
expenses  of  a  trading  business,  but  they  include  only  those  that  relate  to  the 
particular  shop   or  factory   covered  in  the  manufacturing  accounts  and  not 
to  the  general  expenses  of  the  business,  unless  they  are  all  included  in  factory 
expense,  which  would  be  permissible  only  in  rare  instances  and  under  very  unusual 
circumstances.     (Read  1f3lO,  314,  etc.) 

646.  To  the  manufacturer,  a  thorough  understanding  of  the  different  ele- 
ments of  cost  entering  into  the  manufacture  of  the  goods  he  makes  or  produces  is 
of  the  utmost  importance,  and  since  the  accounts  of  a  manufacturing  concern  are, 
in  a  large  part,  a  record  of  these  various  costs,  it  is  also  important  that  the  student 
of  accounts  should  understand  them  and  their  relations  to  the  various  manufac- 
turing processes  before  he  proceeds  to  a  detailed  study  of  these  processes  and  of 
the  various  manufacturing  accounts  and  records.     This  leads  us  to  a  considera- 
tion of  cost  accounting. 


202  BOOKKEEPING  AND  ACCOUNTANCY 

COST  ACCOUNTING. 

647.  Cost  accounting  refers  to  that  department  of  accountancy  which  has 
for  its  purpose  the  ascertaining  and  recording  of  the  actual  cost  of  making  things, 
i.e.,  the  actual  manufacturing  cost  of  a  given  article  or  product.     It  is  sometimes 
called  "Costing,"  and  when  installed  in  connection  with  a  particular  concern  it  is 
generally  referred  to  as  a  "cost  system." 

648.  Cost  accounting  is  perhaps  the  least  understood  of  the  many  subjects 
relating  to  accountancy.     It  is  also  considered  to  be  one  of  the  most  difficult 
subjects  an  accountant  has  to  deal  with,  not  because  its  general  underlying 
principles  and  the  objects  to  be  obtained  are  so  hard  to  understand,  for  they  are 
quite  simple,  but  rather  because  of  the  trouble  experienced  in  applying  these 
principles  to  meet  the  infinite  variety  of  conditions  found  in  connection  with 
different  manufacturing  processes  and  establishments.     A  high  order  of  profes- 
sional experience  and  skill  is  required  to  work  out  the  details  of  a  satisfactory 
cost  system  for  a  concern  of  any  considerable  size,  where  the  manufacturing 
processes  are  at  all  complicated.     Cost  accounting  is,  therefore,  given  a  some- 
what   fuller    explanation   in  this  work   than   would    otherwise  be  necessary, 
although  the  discussion  is  directed  to  the  records  and  bookkeeping  features  of 
the  subject  rather  than  to  those  that  relate  to  shop  organization,  shop  man- 
agement, labor  efficiency,  cost  installation,  etc.,  which  are  subjects  outside  the 
main  purpose  of  this  text,  although  they  are  given  some  incidental  attention. 

649.  It  should  be  understood  that  cost  accounting  is  not  a  system  of  book- 
keeping so  much  as  a  system  of  cost  records  and  of  methods  to  ascertain  the  actual 
cost  of  the  material,  labor,  and  expenses  entering  into  the  finished  manufactured 
product.     Cost  books  and  records  are  separate  and  distinct  from  the  regular, 
or  commercial,  account  books  of  the  concern,  although  the  closer  they  are  inter- 
woven and  articulated  with  the  various  manufacturing  accounts  of  the  principal 
books  the  better  the  results  flowing  from  the  cost  system  installed  are  likely  to  be. 
It  is,  in  fact,  a  study  of  "cost  of  production"  as  well  as  of  cost  accounts. 

650.  Cost-keeping,  or  cost  finding,  is  frequently  considered  a  specialty  in 
factory  management.     While  a  cost-keeper  should  know  accountancy,  he  may 
not  rank  high  outside  of  his  specialty.      The  ability  to  ascertain,  analyze,  and 
compare  the  facts  and  conditions  of  a  particular  factory  or  concern  is  the  first 
requisite.     The  second  is  the  ability  to  work  out  a  practical  cost  system  that  will 
suit  the  facts  and  conditions  as  they  exist,  and  give  the  "units  of  information" 
required  for  efficient  management. 


COST  ACCOUNTING  203 

651.  Modern  commercial  and  industrial  methods  have  made  cost  account- 
ing a  necessity.     The  margin  of  profit  between  cost  and  selling  price  of  standard 
commodities"has  been  narrowing  steadily  as  our  natural  resources  have  been  devel- 
oped and  our  trade  and  manufacturing  conditions  have  become  more  clearly 
defined  and  settled.     The  consumer — the  man  who  buys — is  in  the  market  to 
purchase  as  cheaply  as  possible;  in  fact,  all  other  things  being  equal,  he  will  invari- 
ably buy  where  he  can  get  "the  same  goods  for  less  money"  or  "more  goods  for 
the  same  money."     The  merchant,  or  trader— the  man  who  sells  to  the  consumer 
and  buys  from  the  manufacturer  or  producer — transmits  this  pressure  of  competi- 
tion for  the  lowest  possible  price  back  from  the  man  who  buys  to  the  man  who 
makes  the  goods. 

652.  The  manufacturer — the  man  who  makes  things — must  find  his  profit 
between  the  price  for  which  he  can  sell  his  products  and  their  "cost  to  make." 
He  cannot  fix  his  prices  higher  than  the  prices  of  other  manufacturers  for  the  same 
article.     He  must  meet  competition.     If  he  would  make  a  profit  he  must  manu- 
facture as  cheaply  as  his  competitors,  and  if  he  can  reduce  his  "cost  to  make" 
below  the  cost  to  make  of  his  competitors,  he  can  increase  his  profit  to  that  extent, 
and  still  meet  competition. 

653.  Here  we  are  brought  face  to  face  with  the  necessity  of  cost  accounting, 

i.e.,  a  system  of  records  and  accounts  that  will  show  the  actual  cost  of  producing 
any  given  article  or  number  cf  articles  through  every  process  of  manufacture, 
covering  the  entire  period  from  the  time  materials  are  put  in  process  and  the 
labor  is  employed  which  will  transform  them  into  manufactured  products,  until 
the  time  the  finished  article  is  ready  for  sale  and  delivery,  and,  indeed,  until  the 
time  when  it  is  sold  and  delivered  to  the  buyer. 

654.  What  constitutes  cost.     The  cost  of  an  article,  as  already  indicated, 
may  be  divided  into  three  parts,  namely:  cost  of  material  and  labor,  which  are 
known  as  "direct  charges,"  and  cost  of  factory  expenses,  which  are  known  as 
"indirect  charges." 

(1)  Cost  of  material  includes  cost  of: 

(a)     The  raw  article. 

(6)     Completed  parts  purchased. 

(c)    Partially  completed  parts  purchased. 

(2)  Cost  of  labor  includes  the  cost  of  prodiictive  labor  directly  employed  in  the  manu- 
facturing processes,  but  does  not  include  incidental  labor  about  the  factory  or  shop   not 
employed  directly  in  the  manufacturing  processes. 

(3)  Cost  of  factory  expenses  ("burden")  includes: 

(1)  Rent  and  taxes  of  factory. 

(2)  Depreciation  and  maintenance  of  plant,  machinery  and  tools. 


204  BOOKKEEPING  AND  ACCOUNTANCY 

(3)  Motive  power,  lighting  and  heating. 

(4)  Superintendence. 

(5)  Unproductive  labor,  including  wages  of  timekeepers,  storekeepers,  and  those 

employed  for  other  purposes,  such,  as  cleaning  factory,  distributing  and  col- 
lecting tools,  etc. 

(6)  Interest  on  capital  invested  in  materials,  supplies,  plant,  machinery  and  tools. 

654a.  In  addition  to  the  cost  of  material,  the  cost  of  labor,  and  the  cost  of  factory  expenses, 
stated  above,  it  is  sometimes  considered  that  some  part  of  the  administrative  or  "overhead" 
expenses  should  be  included  in  the  "cost  to  make." 

(1)  Administrative  expenses  include: 

(1)  Salaries  of  managers,  clerks  and  directors. 

(2)  Rent,  taxes,  etc.,  of  show-rooms,  and  office  and  general  office  expenses. 

(3)  Discounts,  allowances,  and  bad  debts. 

(4)  Interest  on  capital  other  than  that  included  under  "factory  expenses." 

(2)  Factory  expenses,  or  "burden,"  are  always  included  in  the  "cost  to  make,"  i.e.,  the  pro- 
duction cost  of  the  article.    Administrative  expenses,  on  the  other  hand,  are  never  included  in 
the  cost  of  production  unless  they  contain  items  which  are  clearly  manufacturing  expenses. 
However,  both  administrative  and  selling  expenses,  with  the  profit,  must  be  included  in  finding 
the  selling  price  of  the  article. 

655.  A  thorough  understanding  of  the  different  elements  of  cost  entering 
into  the  total  cost  of  manufacturing  and  marketing  a  given  article  or  line  of 
goods  is  fundamental  in  the  study  and  practice  of  cost  accounting.     The  elements 
of  cost  are  cumulative  in  their  finding,  beginning  with  the  first,  or  pi"ime  cost, 
to  which  other  elements  are  added  until,  finally,  the  selling  price  of  the  finished 
product  is  determined.      The  primary  elements  of  cost  are  invariably  material 
and  labor,  although  the  proportions  of  each  entering  into  different  products 
may  vary  greatly. 

656.  Finding  costs.    The  costs  represented  in  material  and  labor  are  not 
hard  to  determine  because  they  are  represented  by  the  actual  cost  of  the  materials 
used  and  the  cost  of  direct  labor  as  shown  on  the  time  cards  and  pay-roll.     The 
costs  of  factory  expenses,  or  "burden,"  and  such  administration  expenses  or 
other  "overhead"  charges  as  may  be  considered  manufacturing  expenses,  are 
somewhat  more  difficult  to  determine  and,  particularly,  to  properly  distribute 
over  the  various  articles  manufactured. 

,  V 

657.  Factory  expenses  consist  of  all  incidental  expenses  for  indirect  labor, 
supplies  and  material,  and  other  items  of  expense  necessary  in  operating  the 
factory  which  are  chargeable  directly  to  the  cost  of  manufacture.     (1(645)     These 
expenses  are  known  as  "burden,"  doubtless  for  the  reason  that  they  must  be 
borne  and  provided  for  as  a  part  of  the  factory  cost  of  the  articles  produced. 


COST  ACCOUNTING  205 

658.  Overhead  expenses  are  those  which  are  incurred  in  the  administrative 
department  of  the  concern  but  which  have,  in  fact,  increased  the  cost  of  produc- 
tion in  the  factory,  works  or  plant,  either  in  their  management  or  in  technical 
or  clerical  service  rendered,  although  instead  of  being  charged  directly  to  factory 
expense,  which  is  always  preferable,  are  charged  in  the  general  or  administrative 
expense  accounts  of  the  concern.     These  are  known  as  "overhead'*  expenses, 
doubtless  because  they  represent  a  manufacturing  cost  over  and   above  those 
included  under  the  head  of  factory  expense,  or  burden. 

659.  It  is  sometimes  difficult  to  distinguish  between  what  should  properly 
be  classed  as  administrative  expenses  and  those  which  should  properly  be  con- 
sidered as  manufacturing  expenses.     An  illustration  is  where  part  of  the  services 
of  officers  or  office  employes  are  given  to  the  manufacturing  department  and  part 
to  the  selling  or  financial  departments.     Another  illustration  relates  to  the  proper 
account  to  be  charged  for  drawings  and  patterns. 

660.  Just  what  overhead  expenses  should  be  included  in  "factory  cost,"  or 
"works  cost,"  or  "cost  of  production,"  as  it  is  variously  designated,  is  a  question 
about  which  there  are  differences  of  opinion.     Some  hold  that  all  expenses  out- 
side of  those  incurred  in  effecting  sales  and  in  the  management  of  the  financial 
affairs  of  the  concern  are  necessarily  incurred  in  connection  with  the  manufactur- 
ing processes  and  that  they  should,  therefore,  be  included  in  the  manufacturing 
costs  in  ascertaining  the  "factory,"  or  "works"  cost,  or  the  "cost  of  production." 
This  view  is  opposed  by  the  argument  that  it  might  yery  easily  be  carried  to  the 
extreme  of  including  a  large  part  of  the  administrative  or  other  general  expenses 
in  factory  expense,  which  would,  in  fact,  capitalize  them  by  including  them  in 
the  cost  of  the  goods  manufactured,  as  shown  in  the  finished  goods  account,  and 
would  thus  show  them  as  assets  in  the  final  statements  of  the  business  instead 
of  expenses  chargeable  against  income. 

661.  Others  hold  that  manufacturing  costs  should  include  only  those  that 
are  incurred  in  the  factory  or  works  proper,  and  that  those  incurred  in  connection 
with  the  administration  or  financial  departments  of  the  business,  even  when 
including  the  cost  of  technical  or  clerical  service  rendered  to  the  factory,  should  in 
no  way  be  considered  as  factory  expenses  and,  therefore,  should  not  be  included 
among  the  elements  of  cost  of  production  chargeable  to  orders,  jobs  or  contracts. 
The  point  at  which  the  line  is  drawn  between  factory  and  other  expenses  by  those 
who  hold  this  view  is  illustrated  in  a  concern  having  its  plant  in  the  country  and  its 
commercial  office  in  the  city,  where  only  the  expenses  of  the  former  would  be 
included  in  factory  cost,  the  expenses  of  the  latter  being  classed  as  expenses  of 
conducting  the  business  that,  in  a  bookkeeping  sense,  should  be  charged  against 
income. 


206  BOOKKEEPING   AND   ACCOUNTANCY 

662.  There  is  general  agreement,  however,  that  the  best  practice  is  to 
charge  all  expenses  that  are  classed  as  factory  expenses  directly  to  that  account 
at  the  time  the  entry  is  made,  which  will  avoid  any  later  question  as  to  their 
proper  disposition  and  will  eliminate  all  questionable  items  from  the  adminis- 
trative or  general  expense  accounts,  so  that  these  accounts  will  thei  clearly  repre- 
sent balances  which  should  be  charged  against  income  and  should  appear  only  in 
the  trading  and  profit  and  loss  statement. 

663.  A  careful  consideration  of  these  views  would  seem  to  indicate  that  the 
line  between  factory  costs  and  administrative  and  other  costs  should  be  drawn  at 
that  point  which  would  include  as  manufacturing  expenses  only  thost  items  that 
are  clearly  a  direct  element  of  cost  in  the  production  of  the  manufactured  article, 
no  matter  in  what  account  they  may  be  found.     In  any  event,  what  should  be 
considered  manufacturing  costs  and  what  should  constitute  administrative  and 
other  expenses,  and  the  place  at  which  the  former  should  end  and  the  latter  begin, 
must  be  decided  separately  for  each  establishment  in  which  a  cost  system  is 
installed,  either  by  the  owners  or  by  the  accountant.     (11752) 

664.  The  cost  formula  given  below  clearly  shows  the  various  elements  of 
cost  entering  into  the  finished  product,  from  the  prime  cost  to  selling  price.     It 
agrees  substantially  with  the  cost  formulas  prepared  by  a  number  of  the  leading 
cost  specialists,  which  are  generally  accepted  as  being  as  nearly  accurate  as  they 
can  be  made.     The  elements  of  cost  may  be  thoroughly  understood  from  a  study 
of  this  formula  and  the  graphic  illustrations  showing  cost  elements  which  follow, 
particularly  if  the  accompanying  explanations  are  carefully  considered. 

COST  FORMULA. 

(1)  Cost  of  Material  -f  Direct  Labor  =  First  or  Prime  Cost. 

(2)  Prime  Cost  +  Factory  Expense,  or  "burden,"  =  Factory  Cost,  or  Cost 
of  Production. 

(3),  Factory  Cost  +  General  and  Administration  Expenses,  or  "Overhead," 
=  Total  Cost. 

(4)     Total  Cost  +  Selling  Expense  and  Profit  =  Selling  Price. 

665.  While  "prime  cost,"  "factory  cost,"  and  "total  cost"  are  terms  com- 
monly used  and  accepted,  there  are  other  terms  used  to  express  the  same  costs 
which  are  preferred  by  some  writers.     There  is  general  agreement  as  to  what  should 
be  included  as  first  or  prime  cost,  but  there  is  some  difference  of  opinion  as  to  what 
should  be  included  under  "factory  cost"  and  "total  cost,"  and  as  to  what  propor- 
tion, if  any,  of  administrative  and  general  expenses  should  be  included  as  factory 
costs,  as  has  already  been  explained  in  1(660,  661. 


COST  ACCOUNTING 


207 


666.  EXPLANATION  SHOWING  THE  RELATION  BETWEEN  THE  ELEMENTS  OF 
COST  IN  THE  FORMULA  AND  THE  MANUFACTURING  ACCOUNTS  IN  THE  GENERAL 
LEDGER. 

a.  The  first,  or  prime  cost  is  made  up  of  the  cost  of  material  and  direct  labor,  and  corre- 
sponds exactly  with  the  items  charged  to  materials  in  process  and  productive  labor  accounts 
(T[711a,  716a)    These  items  are  shown  on  the  shop  cards  or  in  the  job  ledger  at  the  time  when  th- 
order,  job  or  contract  is  completed.     (1J750,  741o) 

b.  Factory  cost  represents  the  prime  cost,  plus  manufacturing  expense,  or  "burden.' 
(H719)     Theitemsof  factory  expense  are  indicated  in  H645,  734a,  6.     The  items  referred  to  ar< 
those  of  the  factory  or  works  only  and  not  those  of  the  office  or  general  establishment.     The?'- 
factory  costs,  when  distributed,  agree  exactly  with  the  items  credited  to  the  contra  manuff 
turing  expense  account.     (1f722c) 

c.  Total  cost  equals  factory  cost,  plus  such  general,  administrative  or  other  "overhead" 
expenses,  etc.,  as  may  be  charged  to  the  various  orders,  jobs  or  contracts.    The  items  included 
in  the  "total  cost,"  or  "total  cost  to  make,"  correspond  exactly  with  those  charged  to  finished 
goods  account.     (^f741a) 

d.  The  selling  price  equals  the  total  cost,  plus  such  percentages  or  other  proportions  of 
that  cost  as  are  added  for  selling  expenses  and  for  the  profit  to  be  made  on  the  goods  sold. 
Selling  expenses  are  not  and  should  never  be  considered  as  manufacturing  expenses,  and  should 
never  be  included  in  the  production  cost  of  goods  manufactured.     "Selling  price"  exactly 
corresponds  to  the  amount  credited  to  sales  count.     (1f745) 

c.  The  selling  expense  account  of  a  manuf acturing  business  corresponds  exactly  with  the 
same  account  for  a  trading  business.  (f2G4  to  277)  It  is  a  profit  and  loss  account  and,  like 
other  similar  accounts,  must  be  deducted  from  the  gross  income  shown  by  the  trading  statement 
before  the  net  profit  can  be  ascertained. 

667.  The  cost  formula  following  ^[664  may  be  further  illustrated  by  the 
following  diagram,  in  which  it  will  be  noted  that  100%  represents  the  "total 
cost,"  the  percentages  below  representing  the  proportions  of  the  different  elements 
znteriner  into  the  total  cost  and  those  above  representing  the  additions  to  find  the 
seilirg  price  after  providing  for  selling  expenses  and  profit. 


208 


BOOKKEEPING  AND   ACCOUNTANCY 

ANOTHER   COST    FORMULA. 


668.  The  following  formula  is  described  as  "  Analysis  of  Sale  Price  of  a  Man- 
ufactured Article."*  In  this  formula  it  will  be  seen  that  there  is  some  difference 
in  the  terms  used  to  express  the  various  costs  as  they  are  cumulated,  "shop  charge" 
being  substituted  for  factory  expense,  or  burden,  and  "general  establishment 
charge"  being  substituted  for  administrative  and  general  expenses,  or  over- 
head. In  like  manner,  "works  cost"  and  "inclusive  costs"  are  substituted  for 
factory  costs  and  total  costs. 


Sailing  Price  $505 


Inclusive  or  No.  3  Cost  $420- 


-Torts  or  No.  2  Cost  $400- 


(Prime  or  tfo.  1  Cost  $265- 


General 

Material 

TCagea 

Shop  Charge 

Establishment 

Profit 

$125 

$140 

$135 

Charge 

$85 

This  analysis  divides  the  cost  of  production  into  three  divisions : 

First — The  bare  cost  of  material  and  wages,  which  is  termed  prime  cost,  or  "No.  1  cost." 

Second — Prune  cost,  plus  the  expenses  of  production  incurredin  passing  through  the  shops, 
which  is  termed  works  cost,  or  "No.  2  cost." 

Third — Works  cost,  plus  the  expenses  of  the  commercial  management  and  selling  organi- 
zation, which  is  termed  inclusive  cost,  or  "No.  3  cost." 

The  sales  price,  less  inclusive  cost,  equals  the  profit  on  the  order.  This  division  of  costs 
agrees  with  the  theory  expressed  in  1[661,  which  would,  of  course,  eliminate  any  part  of  the 
general  expenses  from  cost  of  production. 

Note:    Other  good  books  for  the  student  of  accountancy  are: 

"Industrial  Plants,  Their  Arrangement  and  Construction,"  by  Charles  Day. 

"The  Complete  Cost-keeper,"  by  H.  S.  Arnold. 

"The  Factory  Manager,"  by  H.  S.  Arnold. 

"The  Depreciation  of  Factories,"  by  Ewing  Matheson. 

"Bookkeeping  for  Accountant  Students,"  by  L-  R.  Dicksee. 

"Modern  Accounting,"  by  H.  il.  Hatfield. 


•  "Eaapsnee  Burden,"  by  A.  Hamilton  Church. 


ADVANTAGES   OP  A   COST   SYSTEM  209 

SOME  OF  THE  ADVANTAGES  OF  A  COST  SYSTEM. 

669.  When  the  actual  cost  of  producing  a  given  article  or  a  number  of  arti- 
cles or  a  certain  line  of  goods  is  known,  the  manufacturer  is  in  a  much  better  posi- 
tion to  manage  his  business  intelligently,  either  in  purchasing  materials,  in 
employing  labor  or  in  the  production  of  manufactured  goods,  than  he  would  be  with- 
out that  information.  While  finding  the  actual  cost  of  manufacture  is  the  most 
important  object  of  any  cost  system,  there  are  many  other  advantages  that  are 
of  equal,  and  frequently  of  greater  importance  in  the  ultimate  results  produced. 

Some  of  the  advantages  of  a  cost  system  are  as  follows: 

1.  To  know  the  exact  cost  of  the  materials  entering  into  each  manufactured  article,  order 
or  job,  and  to  have  all  material  purchased  and  used  correctly  accounted  for,  so  that  the  balance 
shown  by  the  materials  account  may  agree  with  the  inventory  value  of  the  materials  in  the  store- 
room. 

2.  To  know  the  amount  and  the  wage  value  of  tune  spent  on  each  article,  operation  or 
order,  and  to  know  the  degree  of  efficiency  of  each  workman  so  that  those  who  are  high  in  effi- 
ciency may  be  rewarded  and  those  who  are  low  may  be  dispensed  with;  and,  particularly,  to 
assign  tasks  to  each  workman  in  proportion  to  his  skill  and  ability  to  perform  them  well  and 
efficiently. 

3.  To  know  the  relative  cost  of  production  by  the  use  of  improved  machines  over  old  and 
less  efficient  types,  and  to  know  the  cost  per  hour  or  day  of  operating  each  machine  separately 
or  in  groups,  departments  or  producing  centers. 

4.  To  know  the  actual  cost  of  "burden"  expenses  of  the  factory  or  shop,  or  of  "over- 
head" expenses  of  the  office  or  administrative  department,  and  of  depreciation  which  should  be 
included  in  the  cost  of  manufacture  and  distributed  over  the  product. 

5.  To  know  the  location,  the  condition  and  the  advancement  of  each  unfinished  article, 
order  or  contract,  at  any  given  time  while  in  the  process  of  manufacture. 

6.  To  know  by  running  book  inventories,  supported  by  controlling  accounts,  how  much  of 
each  kind  of  material,  supplies,  and  finished  goods  is  on  hand,  so  that,  with  the  smallest  invest- 
ment of  capital,  orders  may  be  placed  in  right  quantities  and  at  proper  times  to  meet  all  require- 
ments, and  to  prove,  these  accounts  at  stated  intervals  by  actual  inventories  of  stock  on  hand. 

7.  To  show  on  manufacturing,  trading  and  profit  and  loss  statements  or  on  statements 
supplementing  them,  all  essential  elements  of  cost  and  production  in  whatever  detail  they  are 
desired. 

8.  To  make  possible  the  preparation  of  statistical  and  other  statements,  so  arranged  that 
the  information  contained  therein  may  be  compared  with  similar  statements  of  other  fiscal 
periods  to  ascertain:  (a)  increase  or  decrease  of  total  output;  (6)  increase  or  decrease  of 
monthly  output;  (c)  increase  or  decrease  of  idle  time;  (d)  increase  or  decrease  of  labor  efficiency 
and  of  machinery  efficiency;   (e)  increase  or  decrease  of  cost  oi  production  per  order,  job  or 


210  BOOKKEEPING  AND   ACCOUNTANCY 

contract  or  per  any  other  convenient  unit  of  comparison;  (/)  increase  or  decrease  of  selling 
expenses,  of  administration  expenses,  of  gross  profit  and  of  net  profit;  (c/)  relative  efficiency  and 
cost  of  different  classes  of  labor. 

9.  To  have  such  results  available  as  will  disclose  defects  in  organization  or  administration, 
§o  that  they  may  be  rectified. 

10.  To  know  the  productive  value  of  every  unit  or  factor  available  for  use  in  the  factory  or 
plant,  so  that  the  exact  cost  of  each  item  entering  into  the  manufacture  of  any  given  article  or 
product,  and  its  factory  cost,  may  be  correctly  and  accurately  ascertained  in  estimating  the 
coat  and  selling  price  of  goods  called  for  in  prospective  orders,  jobs  or  contracts. 

11.  To  know  the  percentages  or  amounts  which  must  be  added  to  factory  cost  to  covet 
overhead  and  other  expenses  necessary  to  produce  and  market  the  goods  at  a  profit,  called  for 
in  estimating  on  prospective  orders,  jobs  or  contracts,  or  otherwise. 

12.  To  have  information  at  hand  that  will  provide  a  basis  for  calculating  the  allowances 
which  should  be  made  for  unexpected  contingencies  and  losses  in  estimating  the  cost  of  goods 
called  for  in  prospective  orders,  jobs  or  contracts. 

669a.  Thus  it  will  be  seen  that  an  efficient  cost  system  enables  the  manu- 
facturer to  decrease  costs  and  increase  production  and  profits  in  many  ways  which 
would  otherwise  be  impossible;  such  as: 

1.  To  reduce  the  cost  of  and  waste  in  material  and  time  used. 

2.  To  increase  labor  production  and  secure  higher  efficiency  in  workmen  by  assigning 
maximum  tasks  which  they  are  willing  and  competent  to  perform. 

3.  To  reduce  cost  and  increase  production  by  the  use  of  improved  machinery. 

4.  To  reduce  expenses  in  factory  or  office  by  increasing  the  efficiency  of  employees  and 
dispensing  with  unnecessary  labor  and  inefficient  service. 

5.  To  know  the  maximum  capacity  of  the  factory  or  plant  in  a  given  process,  group,  depart- 
ment or  producing  center  for  a  given  time,  that  work  may  be  so  distributed  as  to  maintain 
the  factory  or  plant,  as  a  whole,  at  the  highest  point  of  productive  efficiency. 

6.  To  establish  wage  systems  that  will  secure  to  the  diligent  the  proper  rewards  for  indus- 
try and  that  will  encourage  and  stimulate  workmen  to  perfect  themselves  in  ability  and  produc- 
ing capacity. 

7.  To  know  the  goods  which  may  be  manufactured  and  sold  at  the  largest  profit,  and  to 
know  those  goods  which  cannot  be  manufactured  and  sold  at  a  fair  profit,  so  that  the  sales  of 
the  former  may  be  increased  and  those  of  the  latter  diminished  or  discontinued. 

8.  To  estimate  accurately  and  expeditiously  on  specifications  of  prospective  orders  or 
contracts. 


ADVANTAGES  OF  A   COST  SYSTEM  211 

670.  Many  advantages  other  than  those  enumerated  follow  the  introduc- 
tion of  well-administered  cost  systems,  although  they  vary  somewhat  in  impor- 
tance, depending  upon  the  condition  and  circumstances  of  the  business.     The 
extent  to  which  increased  efficiency  in  labor,  machinery,  operation  and  output 
is  secured  by  the  introduction  of  a  cost  system  determines,  in  a  large  measure,  the 
extent  of  its  usefulness  and  value  in  a  manufacturing  concern. 

671.  It  is  not  the  purpose  of  cost  accounting  to  show  what  a  given  order, 
job  or  contract  should  cost  or  to  show  its  estimated  cost  or  to  show  any  cost 
other  than  the  actual  cost  after  it  is  completed;  i.e.,  the  purpose  is  to  show  the 
exact  cost  of  each  article  made,  and,  through  the  various  subsidiary  and  controlling 
accounts,  what  the  actual  results  of  the  manufacturing  processes  have  been. 
A  comparison  between  the  estimated  cost  when  the  order,  job  or  contract  was 
accepted,  and  the  actual  cost  when  it  is  completed,  will  show  any  inaccuracies  in 
the  estimate,  and  will  give  substantial  information  for  making  future  estimates. 

672.  The  efficiency  of  a  cost  system  depends  almost  wholly  upon  the  organi- 
zation back  of  it  and  how  the  system  is  planned,  installed  and  carried  out.     The 
best  cost  systems  are  usually  those  which  have  small  beginnings  and  are  gradually 
developed  and  perfected  until  they  fully  meet  the  particular  requirements  for 
which  they  are  intended.     In  planning  a  cost  system,  care  should  be  taken  to 
provide  for  the  practical  requirements  rather  than  the  theoretical  requirements  of 
the  case,  and  to  avoid  the 'creation  of  a  system  that  will  be  expensive  to  install  or 
operate.     It  is  impossible  to  formulate  or  construct  a  single   system  of  cost 
accounting  that  will  meet  the  requirements  of  every  line  of  business;  indeed,  a 
special  system  must  be  planned  for  each  particular  concern,  as  no  two  establish- 
ments are  likely  to  present  for  consideration  the  same  conditions  and  facts. 

673.  Before  attempting  to  formulate  a  cost  system  for  any  particular  con- 
cern, it  is  first  necessary  to  make  a  careful  study  and  survey  of  the-  plant  or 
factory  and  its  organization,  and  of  all  the  circumstances  surrounding  it.     How* 
ever,  as  the  purpose  of  this  book  is  to  give  consideration  to  the  accounting  features 
of  cost  systems  rather  than  to  the  devising  of  cost  systems  or  the  study  of  shop 
organization,  management,  labor  efficiency,  etc.,  these  topics  receive  only  inci- 
dental attention. 


212  BOOKKEEPING  AND   ACCOUNTANCY 

WAGE  SYSTEMS. 

674.  Time  is  one  of  the  principal  and  most  expensive  elements  of  cost  in 
manufacturing.  As  labor  is  one  of  the  elements  of  prime  cost,  some  discussion 
of  wages  is  necessary.  There  are  various  wage  systems  in  common  use,  such  as 
the  day  rate,  piece-work  rate,  differential  rate,  premium,  bonus,  profit-sharing, 
stock  distribution  or  some  combination  of  these  systems.  The  best  "system  to 
use  is  determined  by  the  conditions  surrounding  the  particular  establishment  in 
which  it  is  to  be  employed.  An  understanding  of  these  systems  is  important  to 
the  student  of  accounts,  principally  because,  in  many  instances,  they  form  the 
basis  of  computation  for  the  distribution  of  factory  expenses,  or  burden. 

The  day  rate.  This  is  perhaps  the  commonest  method  of  paying  wages.  Under  this  method 
each  workman  is  paid  a  certain  price  for  each  day's  or  hour's  labor,  depending  upon  his  skill 
and  experience. 

Piecework.  Under  this  method,  each  workman  is  paid  a  certain  price  for  the  production 
of  a  certain  article  or  part.  He  is  paid  for  what  he  does  and  no  more.  It  has  many  advan- 
tages, but  in  its  practical  operation  it  has  certain  deficiencies  that,  not  infrequently,  make  it 
objectionable. 

Differential  rate.  This  is  the  piece-work  method,  modified  by  an  application  of  the  time 
rate  to  the  work.  By  this  plan  the  workman  is  paid  "a  higher  price  for  quick  time  and  per- 
fect work,  and  a  lower  price  for  slow  time  and' imperfect  work."  This  system  is  more  nearly 
ideal  in  its  operation  than  either  the  uay-rate  or  the  piece-work  plan. 

The  premium  plan.  This  method  differs  from  piece  work  by  paying  a  premium  for  the  com- 
pletion of  a  certain  task  in  less  time  than  the  average  time  allotted  for  its  performance. 

The  bonus  plan.  This  is,  practically,  a  combination  of  the  differential  and  premium  plans, 
in  that  it  offers  '  'an  increase  in  the  hourly  wages  for  the  time  actually  spent,  the  rate,  itself, 
depending  upon  the  per  cent  of  time  gained." 

Profit-sharing  and  stock  distribution.  These  are  held  out  as  ideal  methods  of  increasing 
production  and  establishing  the  best  relations  between  employer  and  employee  by  having  each 
workman  share  in  the  profits  in  addition  to  his  regular  wages.  There  are  various  methods 
suggested  for  accomplishing  this  result,  but  as  this  plan  has  not  beetfadopted  in  many  instances, 
its  actual  value  as  a  wage  system  has  not  been  fully  determined. 

Full  descriptions  of  these  and  other  wage  systems  are  found  in  the  following  books,  which 
may  be  referred  to  with  profit: 

"Work,  Wages  and  Profits,"  by  H.  L.  Gantt. 

"Factory  Organization  and  Costs,"  by  J.  L.  Nicholson. 

"Profit-Making  Management,"  by  Charles  U.  Carpenter. 

"Efficiency  as  a  Basis  for  Operation  and  Wages,"  by  Harrington  Emerson. 


DISTRIBUTION   OF  INDIRECT  EXPENSES 
•,         DISTRIBUTION  OF  INDIRECT  EXPENSES. 

675.  The  factory  cost  of  an  article,  as  previously  stated,  is  made  up  of  three 
elements  of  cost — material,  labor  and  factory  expenses,  material  and  labor  being 
known  as  direct  costs,  while  factory  expenses  are  known  as  indirect  costs  or  charges. 

676  The  accurate  distribution  of  factory  expenses  ("burden"  and  "over- 
head") among  the  different  orders,  jobs  or  contracts,  so  that  each  article  manu- 
factured may  be  charged  with  its  actual  cost,  presents  perhaps  the  most  difficult 
problem  as  well  as  one  of  the  most  important  with  which  the  cost  accountant  has 
to  deal,  and  its  difficulty  is  increased  in  proportion  to  the  number  of  the  kinds 
and  varieties  of  goods  manufactured.  (H756) 

677.  The  fixing  of  a  correct  basis  of  distribution  or  as  nearly  an  exactly 
correct  basis  as  may  be  possible,  which  will  connect  and  identify  every  item  of 
cost  with  the  particular  order,  job  or  contract  to  which  it  belongs,  so  that  the 
actual  cost  of  producing  each  article  may  be  definitely  known,  is  fundamental  in 
cost  accounting.     This  must  be  found  in  some  unit  of  measurement  that  will  most 
nearly  assign  to  each  article  the  exact  manufacturing  expense  which  properly 
belongs  to  it.     If  this  unit  of  measurement  is  uncertain  or  variable  in  its  appli- 
cation, the  cost  system  must  fail  to  accomplish  its  most  important  purpose  from 
the  fact  that  it  will  not  certainly  tell  the  truth,  no  matter  how  efficient  it  may  be 
in  other  directions. 

678.  Three  distinct  units  of  measurement  have  been  used,  either  singly  or 
in  some  combination  of  them,  as  the  basis  of  distributing  factory  costs      They  are 
"wages  value,"  "wages  tune,"  and  "machine  time."     Wages  value  is  the  total 
cost  of  direct  labor  for  a  given  period.      Wages  time  is  the  total  number  of  hours 
direct  labor  is  employed  for  a  given  period.     Machine  time  is  the  number  of 
hours  a  given  machine  or  process  is  in  operation  within  a  specified  period. 

679.  Methods  of  distributing  burden  and  overhead.    A  number  of  different 
methods  are  used,  based  upon  one  or  more  of  these  units  of  measurement, 
each  one  doubtless  having  some  advantages  over  the  other  under  certain  condi- 
tions.    Some  are  very  simple  in  their  practical  operation,  while  others  are  more 
complex  and  intricate.     Unfortunately,  the  simpler  methods  are  seldom  accurate 
under  usual  manufacturing  conditions,  while,  on  the  other  hand,  manufacturers 
are  slow  to  adopt  the  more  exact  and  scientific  methods  because  of  the  greater 
expense  required  in  their  practical  operation  and  maintenance.     Several  of  these 
methods  will  now  be  briefly  discussed.     Extended  discussions  may  be  found  in 
the  following  publications,  from  which  some  of  the  statements  in  this  chapter 
are  taken: 

"Proper  Distribution  of  Expense  Burden,"  by  A.  Hamilton  Church. 
"Production  Factors,"  by  A.  Hamilton  Church. 


214  BOOKKEEPING   AND  ACCOUNTANCY 

680.  Direct  labor  cost  method.  This  method  of  distributing  burden  and 
overhead  (manufacturing)  expenses  is  based  on  the  theory  that  the  product 
increases  in  value  in  proportion  to  the  cost  of  labor  entering  into  it,  and  that 
the  greater  the  amount  of  labor  involved  in  the  process  of  manufacture  the  greater 
the  expense  required  to  supervise  the  labor  and  to  conduct  the  factory,  works 
or  shop,  and  that,  consequently,  the  burden  should  be  distributed  in  the  pro- 
portion the  labor  employed  on  a  given  order,  job  or  contract  bears  to  the  total 
wages  paid  for  the  period  of  time.  This  method,  by  reason  of  its  simplicity,  is 
the  one  most  commonly  used  although  it  is  very  inaccurate  under  most  condi- 
tions and  is,  therefore,  likely  oo  gradually  disappear  as  better  methods  are  adopted. 
The  rate  to  be  used  in  distributing  trie  burden  by  this  method  is  found  by  divid- 
ing the  total  amount  of  estimated  manufacturing  expenses  for  the  period  by  the 
total  cost  of  the  direct  labor  for  the  same  period  of  time.  \H720) 

Illustration:  Supposing  the  total  estimated  factory  expense,  or  burden,  is  $780,  and 
the  total  wages,  $1200,  the  rate  per  cent  for  distributing  the  burden  is  $780  -f-  $1200  =  65%, 
i.e.,  65%  of  the  value  of  the  labor  charged  to  an  order  should  be  added  to  cover  the  cost  of 
burden.  Thus,  an  order  showing  cost  of  material,  $50,  cost  of  direct  labor,  $60,  would'  have 
added  to  it  65%  of  $60,  or  $39  (f722c),  giving  a  total  of  $149  as  the  total  factory  cost.  When 
an  equal  percentage  has  been  added  to  all  the  orders  on  which  the  $1200  for  labor  has  been 
charged  for  the  month,  it  will  absorb  and  take  up  the  total  charge  against  factory  expenses  of 
$780. 

681.  Direct  labor  hours  method.     This  method  is  similar  to  the  direct 
labor  cost  method  except  that  the  number  of  productive  hours  is  used  as  the  basis 
of  calculation  instead  of  the  total  amount  of  direct  wages,  i.  e.,  the  amount  of 
indirect  expenses  is  divided  by  hours  instead  of  dollars.      The  rate  per  hour  to  be 
used  is  found  by  dividing  the  total  estimated  manufacturing  expenses  by  the  num- 
ber of  productive  labor  hours  for  the  same  period  of  time.     Both  the  labor  cost 
and  labor  hour  method  give  an  average  result  instead  of  a  direct  assignment  of 
the  exact  cost  to  the  article  produced,  and  for  this  reason  they  are  both  objec- 
tionable. 

Illustration:  Supposing  the  $1200,  or  the  cost  of  labor,  in  the  preceding  illustration, 
represented  3200  labor  hours,  then  the  rate  is  found  by  dividing  $800  by  3200,  which  equals 
twenty-five  cents  per  labor  hour  to  be  added  for  burden.  If  155  labor  hours  were  expended 
on  the  preceding  job,  the  amount  to  be  added  for  burden  would  be  .25  X  155  =  $38.75, 
making  the  total  cost  of  the  order  $148.75. 

682.  Direct  labor  and  material  method.     This  method  is  considered  to  be 
more  accurate  than  either  of  the  methods  previously  described,  when  the  material 
cost  is  greater  than  the  labor  cost.     The  rate  to  be  used  is  found  by  dividing  the 
total  estimated  factory  expenses  by  the  total  cost  of  the  material  and  labor  con- 
sumed for  the  same  period. 


DISTRIBUTION    OF   INDIRECT   EXPENSES  215 

Illustration:  If  the  material  used  for  the  month  cost  $1100,  the  direct  labor  cost  $750, 
and  the  total  factory  expenses  for  the  month  were  $975,  that  amount  divided  by  $1850  would 
equal  50%,  or  the  rate.  If  the  labor  and  material  on  a  given  order  amounted  to  $116,  50% 
of  that  amount,  or  $58,  should  be  added  to  cover  expense  burden. 

683.  Machine  rate  method.  This  method  is  advocated  by  quite  a  number  of 
cost  specialists.  It  is  intended  to  diminish,  as  much  as  possible,  indirect  fac- 
tory expenses  that,  under  the  preceding  methods,  must  be  prorated  on  a  more 
or  less  arbitrary  basis,  and  to  charge  them  directly  to  the  articles  produced ;  but 
the  method  is  limited,  in  the  opinion  of  some  writers,  to  those  factories  or  shops 
where  the  majority  of  operations  are  machine  processes.  The  plan  of  procedure 
under  this  method  provides  for  charging  the  labor  and  all  burden  or  overhead 
expenses  directly  to  a  process  or  machine,  in  such  a  way  as  to  show  the  total  cost 
per  hour  or  unit  c  f  measure  of  operating  the  machine  or  process.  This  method 
is  substantially  as  follows: 

1.  All  expenses  which  can  possibly  be  charged  to  machines  or  processes  are  so  charged. 
This  includes  indirect  labor,  supplies,  interest,  floor  space,  depreciation,  etc.,  and  sometimes 
superintendence  and  other  general  factory  expenses  are  included.     It  is  this  step  that  consti- 
tutes the  essential  essence  of  this  method. 

2.  The  indirect  expenses  (other  than  the  above)  are  then  prorated  and  distributed  over 
the  machines  or  processes. 

3.  Combining  the  charges  of  one  and  two,  the  total  machine  rate  is  determined,  which 
includes  all  items  of  cost  but  material  and  direct  labor. 

The  rate  to  be  used  in  distributing  the  indirect  expenses  is  found  by  dividing  their  amount 
by  the  total  number  of  operating  hours  or  other  unit  of  measure  for  the  same  period  of  time. 

(a)  To  find  the  cost  of  any  article  is  t*hen  a  simple  process.  The  number  of  hours  a  given 
order,  job  or  contract  is  operated  on  at  each  machine  or  process,  multiplied  by  the  machine  rate 
for  that  process ;  gives  the  different  process  costs.  The  sum  of  these,  or  the  total  process  cost, 
plus  the  material  and  direct  labor  cost,  gives  the  total  factory  cost. 

Illustration:  If  the  work  on  a  given  ordSr  was  operated  on  at  machine  No.  1,  for  twelve 
hours,  and  the  rate  was  thirty  cents  an  hour,  the  process  cost  at  that  machine  is  $3.60.  If  five 
hours  were  required  at  machine  No.  2,  on  which  the  rate  was  forty  cents  an  hour,  the  process 
cost  at  that  machine  is  $2.00.  If  the  work  required  twenty-four  hours  at  machine  No.  3,  at 
the  rate  of  e'ight  cents,  the  charge  would  be  $1.92.  Total  process  or  factory  cost,  $7.52. 

(6)  The  machine  rate  method  would  give  well-nigh  accurate  results  if  all  the  machines 
and  other  processes  were  in  continuous  operation,  but  .it  fails  to  take  account  of  the  idle  time 
when  part  of  the  machines  or  processes  are  not  in  operation.  This  is  the  fatal  weakness  of  the 
method,  as  it  leaves  the  proper  disposition  of  those  expenses  which  are  continuous  in  connection 
with  each  producing  factor  unprovided  for,  with  the  consequent  certainty  that  accuracy  in  the 
distribution  of  costs  has  not  been  attained. 


216  BOOKKEEPING  AND   ACCOUNTANCY 

684.  Scientific  machine  rate  and  supplementary  rate  method.  This  is  a 
method  which  has  been  devised  to  overcome  the  deficiencies  and  inaccuracies 
of  the  other  methods  described  in  the  preceding  paragraphs.  In  this  method, 
labor  value  and  labor  time  are  almost  entirely  eliminated  as  units  of  measurement 
in  the  distribution  of  expense  burden,  while,  like  the  machine  rate  method,  it 
utilizes  the  principle  of  machine  time  as  the  unit  of  measurement,  but  it  goes 
much  further  by  providing  for  the  proper  distribution  of  idle  time.  It  regards 
the  shop  or  factory  as  a~~collection  of  small  "production  centers,"  each  differing 
from  the  other  in  the  cost  to  operate,  but  with  certain  common  connecting  bonds. 
By  a  production  center  is  meant  either  a  machine  or  a  bench  at  which  work  is 
done  or  it  may  be  an  open  floor  space  used  for  different  purposes.  These  are 
also  designated  as  "productive  factors." 

a.  Factory  expenses,  under  this  plan,  instead  of  being  considered  as  one  lump  sum,  are 
kept  separate,  each  expense  being  subdivided  and  prorated  to  the  various  factors  of  production 
in  the  exact  proportion  that  each  factor  derives  benefit  from  the  expense.  For  instance,  rent  is 
subdivided  and  charged  to  each  productive  factor  in  proportion  to  the  floor  space  it  occupies, 
and  so  with  other  items  of  expense,  that  is,  each  production  center,  or  factor  is  charged  with  the 
cost  of  the  different  expense  elements  which  enter  into  the  service  it  renders  in  production. 

6.  These  elements  of  cost  consist  of  the  rent  for  the  space,  power,  light,  he<at,  insurance, 
interest,  depreciation,  repairs  and  maintenance,  and  all  other  items  of  expenditure  necessary 
in  the  operation  of  a  particular  productive  center  for  a  given  period  of  time.  The  sum  of  these 
items  for  a  given  period,  say  a  month  or  a  year,  gives  the  total  cost  of  operating  and  maintaining 
that  particular  productive  center  for  that  tune  and,  consequently,  represents  the  cost  of  the 
service  it  renders  as  one  of  the  productive  factors  of  the  establishment.  This  sum,  divided 
by  the  number  of  working  hours  in  the  period,  will  give  the  cost  per  hour  of  the  service  rendered 
by  that  productive  factor  in  the  manufacturing  processes  of  the  establishment. 

c.  One  of  the  objects  of  this  method  is  to  change  practically  all  of  the  ordinary  factory  ex- 
penses represented  in  these  elements  of  cost  from  indirect  to  direct  charges  by  connecting  them 
with  and  including  them  directly  in  the  cost  of  operating  a  particular  machine  or  productive 
center.     Since  by  this  method  each  productive  factor,  or  center,  is  charged  with  its  share  of  the 
different  elements  of  cost,  it  disposes  of  all  factory  expense  by  absorbing  them  in  the  hourly 
machine  rate  charged  against  the  articles  in  process  of  manufacture,  except  those  expenses 
which  are  of  such  a  general  character  that  they  cannot  be  identified  with  any  particular  order 
or  job,  such  as  idle  machine  or  productive  factor  time,  waste  time,  spoiled  work,  superin- 
tendence, etc.,  all  of  which  are  provided  for  in  a  "supplementary  rate,"  described  in  para- 
graph 684A. 

d.  The  product  of  a  shop  or  factory  in  which  all  the  productive  factors  are  at  work  repre- 
sents its  capacity  for  manufacture.  When  part  of  the  productive  factors  are  idle,  those  in  opera- 
tion'reoresent  the  utilized  capacity  of  the  shop  or  factory,  while  those  which  are  idle  represent 
the  wasted  capacity.    Idle  machine  time,  or  waste  time,  as  it  is  frequently  designated,  is,  there- 
fore, the  amount  of  time  the  various  productive  factors  are  not  in  operation,  i.e.,  the  time 
they  are  unemployed. 


mSTR'lBUTlON   OF   INDIRECT   EXPENSES  217 

e.  Many  of  the  elements  of  cost  attaching  to  each  productive  factor  go  on  whether  the  factor 
is  in  service  or  not,  such  as  rent,  insurance,  light,  heat,  interest,  depreciation,  etc.  The  idle 
time  of  a  productive  factor,  therefore,  represents  a  loss  equal  to  the  cost  of  the  various  ele- 
ments of  expense  charged  to  that  factor,  and  if  the  profit  earned  by  those  productive  factors 
which  are  in  operation  is  to  be  saved,  this  loss  must  be  met  by  adding  its  equivalent  to  the  cost 
of  the  goods  in  course  of  manufacture,  which,  of  course,  will  increase  the  normal  cost  of  these 
goods,  the  normal  cost  being  the  cost  when  all  the  productive  factors  are  employed. 

/.  This  added  cost  on  the  normal  cost,  while  it  may  be  distributed  over  the  cost  of  goods  in 
course  of  manufacture,  is,  strictly  speaking,  no  part  of  such  cost  and  merely  shows  the  ratio 
of  wisted  capacity  to  utilized  capacity,  and  separates  from  the  normal  cost  a  part  of  the  actual 
cost  of  production  which  would  otherwise  be  concealed. 

g.  Wasted  capacity  adds  to  the  production  cost  of  the  articles  in  process  of  manufacture 
in  the  inverse  ratio  of  wasted  capacity  to  the  total  capacity  of  the  shop  or  factory;  for  instance, 
if  a  shop  is  running  at  one-half  its  normal  capacity,  it  will  practically  double  the  cost  of 
production,  outside  of  direct  labor  and  material,  in  those  parts  of  the  shop  that  are  in  opera- 
tion, while,  if  the  shop  is  running  at  one-fourth  its  normal  capacity,  it  will  practically 
increase  the  cost  of  production  to  four  times  the  normal  cost. 

h.  The  supplementary  rate,  referred  to  in  the  heading  to  this  paragraph  (1[684),  takes  care 
of  the  undistributed  balance  of  factory  expenses  due  to  idleness  of  productive  factors  and  waste 
tune,  also  of  spoiled  work,  superintendence  or  supervision,  and  such  other  elements  of  cost  as 
are  not  distributed  through  the  established  hourly  machine  rate  for  each  productive  factor. 
The  amount  of  these  expense  charges  to  be  distributed  through  the  supplementary  rate  is  found 
by  deducting  the  total  amount  of  the  charges  against  work  in  process,  for  services  rendered  by 
productive  factors  in  the  manufacturing  processes  of  the  period,  from  the  total  manufacturing 
expenses,  the  difference  being  the  amount  to  be  distributed  through  the  supplementary  rate; 
i.e.,  the  total  manufacturing  expenses,  less  the  total  value  of  the  productive  machine  hours 
for  the  same  period,  equals  the  amount  to  be  distributed  by  the  supplementary  rate.  (H7216) 

t.  The  supplementary  rate  is  found  either  by  considering  it  as  an  additional  hourly  burden 
charge  placed  upon  each  producing  factor  contributing  to  the  work  performed  in  the  period, 
or  it  may  be  reduced  to  a  percentage  of  increase  on  the  amount  already  distributed  by  the 
machine  rate. 

Illustration:  Supposing  it  is  found  that  factory  expense  accouut  was  charged  during  the 
month  with  items  amounting  to  $170.75.  Machine  No.  1  worked  140  hours  at  30^  =  $42  for  the 
month;  machine  No.  2  worked  150  hours  at  25£  =  $37.50  for  the  month;  machine  No.  3  worked 
260  hours  at  20£  =  $52  for  the  month;  machine  No.  4  worked  175  hours  at  10?!  =  $17.50.  Total 
hours,  725;  total  amount  distributed,  $149.  The  total  charge  to  factory  expense,  $170.75,  less 
the  amount  distributed,  $149,  equals  $21.75  yet  to  be  distributed.  This  is  the  amount  which 
is  to  be  distributed  through  the  supplementary  rate  by  either  one  of  two  methods. 

It  may  be  treated  as  an  hourly  buraen,  the  amount  to  be  added  to  e.ich  productive  hour, 
which  is  found  by  dividing  $21. 75  by  725,  or  3^  per  hour,  which  should  then  be  added  to  the 
hourly  machine  rate  on  each  article  manufactured  during  the  month;  for  instance,  the  rate  for 
machine  No.  1  would  be  4oc  instead  of  40ji. 


218  BOOKKEEPING   AND   ACCOUNTANCY 

Or  the  balance,  $21.75,  may  be  reduced  to  a  percentage  of  the  amount  already  distributed; 
thus,  $21.75  -5-  149,  the  expense  burden  already  distributed,  =  14£%.  Therefore,  if  the 
machine  rate  charge  against  a  given  order  was  $25,  14^%  of  that  amount,  or  $3.63,  would  be 
added,  making  a  total  of  $28.63.  Under  this  latter  plan,  the  calculation  is  reduced  to  a  very 
simple  matter. 

It  will  be  seen  that  by  either  method  the  supplementary  rate  is  very  easily  disposed  of, 
and  where  thje  operations  of  a  given  shop  or  factory  continue  in  a  fair  ratio  of  regularity,  either 
the  increased  hourly  rate  for  each  productive  factor  or  the  increased  percentage  on  the  total 
machine  rate  charge  may  be  added  to  each  order.  Where  there  is  a  considerable  variation  in  the 
time  the  productive  factors  are  employed  in  different  months  or  in  the  unproductive  or  waste 
hours,  it  is  necessary  to  establish  a  separate  rate  for  each  month  either  in  the  form  of  an 
hourly  machine  charge  or  a  percentage  of  the  total  machine  charges  against  each  order. 

j.  The  scientific  machine  rate  and  supplementary  rate  method  is  ably  presented  and  dis- 
cussed by  A.  Hamilton  Church  (see  1[679),  and  as  it  is  the  most  nearly  scientific  method  yet 
discovered,  it  is  worthy  of  careful  study  and  consideration.  It  rests  on  the  principle  that 
organization  is  the  fundamental  basis  of  satisfactory  cost  records,  and  that  the  best  system  of 
costs  cannot  do  more  than  give  the  results  which  naturally  follow  the  kind  of  organization  in 
force,  whether  good  or  poor,  and  that,  consequently,  the  most  satisfactory  results  can  be  secured 
only  through  the  most  efficient  organization. 

685.  Organization,  in  a  manufacturing  sense,  is  defined  as  being  the  ways 
and  means  adopted  and  followed  to  secure  efficient  production,  while  the  true 
object  of  cost  accounts  is  to  register  and  record  every  stage  and  step  of  production 
as  it  actually  happened,  with  the  natural  consequence  that  when  deficiencies  in 
organization  are  discovered,  they  may  be  corrected :  so  that  organization  and  cost 
accounting  are  co-operative,  one  benefiting  the  other,  both  of  them  being  of 
the  highest  importance  in  the  economical  production  of  manufactured  goods. 

685a.  DISTRIBUTION  OF  COSTS.  The  illustration  on  the  opposite  page  shows 
the  method  for  assigning  to  each  productive  factor  its  proportion  of  the  different 
cost  elements  of  factory  expense.  In  the  illustration,  but  six  producing  factors 
are  shown.  In  many  factories,  shops  or  works  there  may  be  a  hundred  or  more 
such  productive  factors  in  the  various  departments,  but  the  method  of  ascer- 
taining the  cost  of  each  productive  factor  is  the  same  whether  there  are  few  or 
many.  In  the  illustration  it  will  be  noted  that  four  of  the  productive  factors 
are  machines,  the  fifth  is  a  workman's  bench  for  hand  work,  and  the  sixth  is 
a  vacant  space  used  for  assembling  parts  and  other  similar  purposes. 


ILLUSTRATION  102 


DISnilBTJTTGN   6*  ftfDIRECT  EXPENSES 
Shop  Floor  Plan       60  ft. 


21V 


(i) 

Machine 

100    sq. 
$500 


(2) 

Wort  touch 
300  sq.   ft. 


(3) 

Machine 
160  aq.  ft. 
$750 


Tool 
Boom 
50  e.  f. 


(4) 

Machine 
75  sq.  ft. 

$250 


(5) 

Machine 
225  sq.  ft. 
$1750 


(6) 

Assembling 
150  SO.  ft. 


Stock  EconT 
150  sq.  ft. 


Explanation:  This  floor  plan  shows  a  space  60  feet  long  and  20  feet  wide,  or  1200  square 
feet.  The  tool  room  and  stock-room  occupy  200  square  feet,  leaving  1000  square  feet  occupied 
by  the  six  productive  factors.  The  number  of  square  feet  occupied  by  each  factor  is  shown. 
The  value  of  each  machine  is  also  shown,  taken  from  the  inventory,  at  cost  price.  The  same 
method  of  procedure  would  apply  to  any  other  space  or  number  of  floors  occupied  for  factory 
purposes. 


ILLUSTRATION  102a  • 

ESTIMATE  OF  UAHUFACTDRIHG  EXPENSES  FOR  THE  YEAR  BEGIOTIHG  JAH.   1,  19 


(PAR.   720,  752) 


Rent  of  factory  space,  60  x  20  ft. 

Light  and  boat   (per  cost  of  previous  year) 

Power  (4  machines,  per  meter  record  for  last  year) 

Taxes. (per  last  year's  assessment) 

Insurance  on  plant 

Repairs  and  renewals  on  machines   (estimated  on  previous  expenditure s) 

Supplies,  oils,  etc. 

Depreciation  and  Interest  on  plant 

Tool  room  charges  for  repairs,  etc. 

Superintendence 

Incidental  labor 

Overhead  management  and  expense 

Jtonthly  average  (4450 -f  12) 

Hourly  average   (based  on  2700  working  hdurs  In  year) 


800. 

50. 
375. 

45. 

65. 
750. 

75. 
420. 
150. 
900. 
420. 
400. 


4450. 


570.85 


.161/2 


(a)  Illustration  102a  shows  the  estimate  of  manufacturing  expenses  made  up  at  the  begin- 
ning of  the  fiscal  period  (If  720)  as  it  would  appear  in  the  manufacturing  expense  estimate  book. 
(H752) 

(6)  Illustration  102b  shows  the  distribution  of  these  expenses  to  the  various  productive 
factors  or  centers,  with  the  yearly,  monthly,  and  hourly  cost  of  operating  each  factor.  It  will 
be  seen  that  the  items  for  rent,  light  and  heat,  and  taxes  are  distributed  in  the  proportion 
of  the  number  of  square  feet  occupied  by  each  factor  to  the  total  number  of  square  feet  (1000) 
occupied  by  all  of  the  factors.  Power  is  usually  distributed  in  the  proportion  of  the  horse- 
power of  each  machine  to  the  total  horse-power  used,  although  when  electricity  is  the  power 
and  aach  factor  has  its  own  dynamo,  this  charge  may  be  accurately  ascertained  by  a  separate 
meter  for  each  machine.  Insurance,  repairs  and  renewals,  supplies,  oils,  etc.,  depreciation 
and  interest,  tool  repairs,  superintendence,  and  incidental  labor  are  distributed  by  special  deter- 
mination of  the  proper  cost  to  be  allotted  to  each  factor;  for  instance,  insurance  is  usually  allot* 


220 

ILLUSTRATION  1026 


BOOKKEEPING  AND  ACCOUNTANCY 


D1STRIBUTIOH  OP  ESTIMATED  MAKUFACTURING  EXPENSES  FOR  tEAR  19 
SHOWING  OPERATING  COST  OF  EACH  PRODUCTIVE  FACTOR  FOR  THE  PERIOD. 


iwduoti* 

faeto 

Items 

Total 

1. 

2. 

3. 

4. 

5. 

6. 

Rent 

800. 

80. 

240. 

120. 

60. 

180. 

120. 

Light  and  beat 

50. 

5. 

15. 

7.50 

3.75 

11.25 

7.50 

Power 

375. 

41.76 

93. 

26.60 

213.65 

Taxes 

45. 

4.50 

13.50 

6.75 

3.38 

10.12 

6.75 

Insurance 

65. 

10. 

15. 

5. 

35. 

Repairs  and  renewals 

750. 

41.66 

63.33 

166.67 

125. 

291.67 

41.67 

Supplies,  oils,  ate. 

75. 

3.50 

5. 

30. 

5. 

25. 

6.50 

Depreciation  and  Interest 

420. 

160. 

60. 

70. 

130. 

Tool  repairs,  etc. 

150. 

25. 

12.50 

37.50 

18.75 

56.25 

Superintendence 

900. 

60. 

300. 

60. 

60. 

180. 

240. 

Incidental  labor,  helpers,  eto 

420. 

21. 

62.50 

21. 

10.50 

105. 

'  210. 

Overhead  expenses 

400. 

66.67 

66.67 

66.67 

66.66 

66.67 

66.66 

Yearly  cost 

4450. 

519.08 

788.50 

684.09 

454.64 

1304.61 

699.08 

370.83 

43.27 

65.75 

57.- 

37.89 

108.72 

-     58.26- 

working  hours  per  year 

1.65 

.19 

.29 

.25+ 

17 

••           .48 

<••         .25  + 

ted  to  each  factor  in  the  proportion  of  the  value  of  that  factor  to  the  total  value  of  the  fao 
tors  insured.  Repairs  and  renewals  must  necessarily  be  allotted  to  each  factor  in  proportion 
to  the  cost  of  maintaining  that  factor,  based  upon  previous  experience  or  costs.  The  same 
is  true  of  supplies,  oils,  etc.,  and  tool  repairs.  Depreciation  and  interest  are  figured  upon  a 
certain  percentage  of  the  cost  of  each  machine  and  other  depreciable  equipment.  The  expense 
of  superintendence  and  incidental  labor  is  distributed  in  the  proportion  of  the  total  time 
that  each  factor  requires  in  its  operation.  Overhead  expenses  are  usually  distributed  equally 
over  the  various  factors,  but  they  may  be  distributed  in  different  proportions  where  any  part 
of  this  expense  can  be  properly  allocated  to  a  particular  factor  or  factors. 

(c)  The  hourly  machine  rate  for  each  factor  shown  on  the  statement  is  the  cost  of  oper- 
ating that  factor.     (1f684d)    When  part  of  the  factors  are  idle,  idle  tune  and  other  cost 
elements  do  not  increase  the  production  cost  of  those  factors  which  are  in  operation,  but 
they  do  increase  the  production  cost  of  the  factory,  i.  e.,  each  article  will  cost  more  to  make. 

(d)  On  the  statement  showing  the  distribution  of  the  estimated  manufacturing  expenses 
for  the  year,  the  average  monthly  and  hourly  operating  cost  of  each  factor  is  shown.    This  is 
known  as  the  "production  cost"  of  each  factor,  to  which  must  be  added  such  additional  costs, 
determined  through  the  supplementary  rate,  as  will  cover  the  loss  from  unproductive  factors 
and  other  sources  to  find  the  hourly  charge  for  work  performed  on  any  order  or  job  by  each 
productive  factor.     (1[684t) 

(e)  When  the  cost  of  operating  any  particular  productive  factor  increases  or  decreases 
because  of  unexpected  or  contingent  circumstances,  the  monthly  and  also  the  hourly  produc- 
tion cost  should  be  increased  or  decreased  accordingly. 

To  illustrate,  the  hourly  production  cost  of  factor  No.  1  is  shown  in  the  statement  to  be 
19f5.  Supposing  an  additional  charge  of  7  cents  per  hour,  determined  by  the  supplementary 
rate,  is  necessary  to  cover  the  cost  of  idle  factors,  etc.,  the  hourly  charge  for  factor  No.  1  is 
26j5.  When  more  productive  factors  are  in  operation,  this  hourly  rate  for  machine  No.  1  would 
be  lowered.  When  fewer  factors  are  in  operation,  it  would  be  increased,  and  the  same  would 
be  true  of  all  the  factors.  If  any  of  the  elements  of  cost  in  the  estimate  of  manufacturing 
expenses  for  the  period  are  increased  or  diminished,  corrections  should  be  made  in  the  hourly 
production  cost  of  each  factor  accordingly. 


THE  DEPARTMENT  METHOD  OF  MANUFACTURING  ACCOUNTS  221 

METHODS  AND  SYSTEMS  IN  MANUFACTURING  ACCOUNTS. 

686.  Methods  and  systems  of  conducting  manufacturing  accounts  vary 
greatly,  depending  upon  the  nature  and  extent  of  the  business  conducted,  and  , 
more  particularly  upon  the  units  of  information  which  the  accounts  are  intended 
to  supply. 

687.  There    are   two   principal    methods   of   conducting    manufacturing 
accounts,  one  which  may  be  designated  as  the  "department"  method  and  the 
other  as  the  "  cost"  method. 

688  In  the  department  method,  the  accounts  are  planned  to  show  the 
cost  of  operating  an  entire  shop  or  f  actory,  or  some  department  of  it,  including  the 
cost  of  the  labor  and  the  various  materials  and  expenses,  the  object  being  to  show 
the  gross  manufacturing  cost  of  the  shop,  factory  or  department  for  a  given  period 
and,  finally,  the  gross  profit  on  the  manufactured  goods  sold. 

689.  In  the  cost  method,  the  accounts  are  planned  to  show  the  manufact- 
uring or  production  cost  of  the  articles  called  for  in  a  particular  order,  job  or 
contract,  without  reference  to  the  profit  of  a  particular  shop  or  department,  the 
object  being  to  show  the  total  cost  of  each  order,  job  or  contract  and,  finally, 
the  gross  profit  between  cost  and  selling  price. 

690.  It  is  not  impossible  to  construct  a  system  of  accounts  that  will  show 
both  department  and  cost  accounts  in  the  same  set  of  books;  indeed,  in  the  books 
of  many  of  the  best  organized  manufacturing  concerns,  where  the  product  is 
at  all  varied  in  its  character,  the  books  are  kept  to  show  the  results  of  both 
methods. 

THE  DEPARTMENT  METHOD  OF  MANUFACTURING  ACCOUNTS. 

691.  When  the  department  method  is  followed,  which  has  for  its  unit  of 
consideration  the  plant,  factory  or  department,  if  it  is  desired  to  show  only  the 
gross  cost  and  the  gross  profit  derived  therefrom  for  the  period,  it  is  necessary 
to  open  a  single  account,  only  which  is  debited  for  all  costs,  including  materials, 
labor  and  expenses.     If  it  is  desired  to  know  the  separate  costs  of  the  materials, 
labor  and  expenses,  an  account  should  be  kept  with  each.     If  there  are  several 
materials,  various  expenses  or  other  elements  of  cost  entering  into  the  finished 
product,  and  it  is  desired  to  know  the  cost  of  each,  separate  account  should  be  kept 
with  them  or  they  should  be  separated  on  analysis  sheets  before  the  manufacturing 
statement  is  prepared. 


222  BOOKKEEPING  AND  ACCOUNTANCY 

692.  Manufacturing  accounts  of  this  description  are  in  all  essential  partic- 
ulars similar  to  the  ordinary  trading  accounts,  and  when  kept  in  connection  with 
the  proper  sales  accounts,  the  gross  profit  of  a  plant,  factory,  shop  or  depart- 
ment can  be  readily  and  accurately  ascertained.     By  opening  the  necessary 
accounts,  the  manufacturing  statements  can  be  made  to  show  the  results  of  the 
transactions  for  the  period  in  whatever  detail  is  desired.     Where  accounts  are 
kept  for  a  number  of  departments  i,n  the  same  establishment,  they  closely  resem- 
ble the  accounts  of  a  department  store  in  a  trading  business. 

693.  When  the  department  method  of  conducting  manufacturing  accounts 
is  followed,  it  is  frequently  supplemented  by  cost  sheets  and  other  memorandums 
which  are  depended  upon  for  figuring  the  costs  and  the  selling  prices  of  the  differ- 
ent articles  manufactured.     In  many  instances  fairly  efficient  cost  systems  are 
thus  maintained. 

RULES  FOR  DEBITING  AND  ..CREDITING  MANUFACTURING  ACCOUNTS  WHEN  THE 
DEPARTMENT  METHOD  is  FOLLOWED. 

694.  The  following  rules  are  for  accounts  opened  under  the  department  plan, 
where  the  balances  shown  by  the  various  material,  labor  and  expense  accounts, 
after  being  credited  with  inventories,  represent  the  various  elements  of  cost  that 
enter  into  and  make  up  the  total  manufacturing  cost.  These  accounts  and  the  rules 
therefor  should  not  be  confused  with  those  given  when  the  cost  method  is  followed. 

JKuLE  FOR  DEBITING  AND  CREDITING  MATERIAL  ACCOUNTS  WHEN  KEPT  TO 
SHOW  THE  COST  OF  MATERIAL  USED. 

695a.  Debit  material  accounts,  under  proper  headings,  for  costs  of  all  material  purchased, 
including  freight,  drayage,  and  all  other  charges  necessary  to  place  the  material  in  the  factory 
ready  for  use. 

6.  Credit  material  accounts  for  all  deductions  from  cost,  and  at  cost  price  for  all  materials 
previously  charged  to  this  account  which  are  sold  or  otherwise  disposed  of. 

c.  The  balance,  less  the  inventory  of  materials  on  hand  taken  at  cost,  shows  the  cost  of 
the  material  used  up  in  the  goods  manufactured  for  the  period. 

696.  Pay-roll  and  time  cards.  A  time  card  is  usually  provided  for  each 
workman  in  an  establishment  on  which  a  record  is  kept  of  his  time  and  the  purpose 
for  which  it  was  employed.  From  these  time  cards  the  pay-roll  and  pay-roll 
distribution  sheets  are  made  up.  There  are  many  different  forms  of  both  time 
cards  and  pay-rolls.  A  pay-roll  is  not  infrequently  bound  in  book  form,  and  is 
sometimes  combined  with  a  form  of  time  card.  In  other  instances  the  time  shown 


THE   COST   METHOD   OF  MANUFACTURING   ACCOUNTS  223 

by  time  cards  is  recorded  in  a  time  book,  from  which  the  pay-roll  is  later  made  up. 
The  proper  design  of  these  cards  and  books  is  determined  by  the  requirements  of 
the  particular  business  for  which  they  are  intended,  and  by  the  kind  of  mechan- 
ical time-recording  system  used  if  such  a  system  is  employed. 

RULE  FOR  DEBITING  AND  CREDITING  LABOR  ACCOUNTS  WHEN  KEPT  TO  SHOW 
THE  COST  OF  LABOR  EMPLOYED  IN  A  GIVEN  SHOP,  FACTORY  OR  DEPARTMENT. 

697a.     Debit  labor  account  for  the  cost  of  all  labor  employed  in  manufacturing  the  goods 
of  a  shop,  factory  or  department  for  the  period. 

6.    Credit  the  account  for  the  value  of  any  labor  employed  elsewhere  which  is  charged  to 
this  account. 

c.  The  balance  shows  the  cost  of  the  labor  employed  in  manufacturing  the  goods  of  the 
shop,  factory  or  department  for  the  period. 

d.  NOTE — The  labor  account  described  above  must  not  be  confused  with  the  labor  account 
described  in  ^563.     That  account  is  really  an  adjusting  account  between  the  pay-roll  and  the 
various  accounts  to  which  the  cost  of  labor  is  finally  charged,  and  should  be  opened  under  the 
title  of  "pay-roll"  account  when  kept  in  connection  with  the  account  described  above. 

698.  Manufacturing  expenses.     These  expenses  are  described  in  ^[685. 

699.  RULE   FOR  DEBITING  AND   CREDITING   MANUFACTURING    EXPENSF 
ACCOUNTS. 

a.  Debit  manufacturing  expenses,  under  proper  headings,  for  the  cost  of  all  expenses 
incurred  in  operating  the  shop,  factory  or  department. 

b.  Credit  the  account  for  any  returns  from  expense  items  charged  to  the  account. 

c.  The  balance  shows  the  cost  of  the  expenses  incurred  in  connection  with  the  manufacture 
of  the  goods  of  the  shop,  factory  or  department  for  the  period. 

THE  COST  METHOD  OF  MANUFACTURING  ACCOUNTS. 

700.  When  the  cost  method  is  followed,  which  has  for  its  unit  of  considera- 
tion the  manufacturing  cost  of  the  articles  called  for  in  each  order,  job  or  contract, 
it  is  necessary  to  devise  a  system  of  cost  records  and  accounts  that  will  show  in 
detail  the  elements  of  cost  entering  into  each  order,  job  or  contract  from  the  time 
it  is  begun  until  it  is  completed.     Such  a  system  differs  in  many  important  par- 
ticulars from  a  system  that  would  meet  the  requirements  when  the  department 
method   alone  is  followed,  notably  in  the  treatment  of  material,  labor  and 
expense  accounts,  and  especially  if  the  cost  records  and  accounts  are  to  be 
supported  by  controlling  accounts  in  the  general  ledger. 


BOOKKEEPING   AND   ACCOUNTANCY 

701.  The  cost  method  of  accounts  is  associated  with  and  is  the  necessary 
complement  of  what  is  popularly  termed  "cost  accounting,"  which  is,  speaking 
more  accurately,  cost  finding  and  cost  distributing,  and  is,  therefore,  as  much  a 
question  of  shop  management  and  a  proper  analysis  of  shop  conditions  and 
records  as  it  is  of  pure  bookkeeping.     This  important  subject  is  treated  in  a 
separate  chapter,  beginning  with  K647. 

702.  The  principal  manufacturing  accounts,  under  the  cost  method,  are 
designed  with  the  double  purpose  of  showing  costs  of  materials,  labor,  manu- 
facturing expenses,   etc.,   and  of  acting   as  control   accounts  for    inventories 
and  the  various  supplementary  accounts  in  the  factory  books.     These  accounts 
are  given  various  names  by  different  accountants,   but  in  this 'text  they  are 
designated  as  "materials"  account •(![ 704),  "materials  in  process"  account  (K710), 
"productive    labor"    account    (If714),    "manufacturing    expense,"   or  "factors 
expense" account  (1(719),  "factory  expenses"  account  (K732),  "finished  goods" 
account  (K740),  "sales"  account  (K745),  and  "cost  of  goods  sold"  account  (K745). 
"Idle productive  factors"  account  is  an  account  that  is  sometimes  kept,  which 
is  debited  for  idle  time  of  productive  factors  ascertained    from  daily  reports 
of  idle  machine  hours,  and  is  credited  for  the  same  amount  when  the  idle  time  is 
distributed  over  work  in  process  through  the  supplementary  rate.    This  account 
would,  therefore,  show  in  one  item,  monthly,  the  lost  time,  or,  more  properly 
the  lost  efficiency  of  the  works  or  shop;  but  the  same  result  may  be  ascertained  in 
another  way,  as  is  described  in  K724.     This  account  is  not  shown  in  this  text. 

MANUFACTURING  ACCOUNTS  WHEN  THE  COST  METHOD 

IS  FOLLOWED. 

703.  A  comparison  of  the  following  rules  with  those  given  for  manufacturing 
accounts  when  the  department  method  is  followed,  will  show  a  number  of  impor- 
tant differences,  and  care  should  be  exercised  not  to  confuse  them.     (K694) 

'  704.  Materials,  under  the  cost  method  of  accounts,  include  all  materials  of 
every  kind  and  description  purchased  to  be  used  in  the  manufacture  of  the  articles 
for  which  the  concern  is  conducted.  Many  accountants  class  materials  under  the 
head  of  '"'stores"  to  distinguish  them  from  "stock"  which  is  used  to  designate 
finished  manufactured  goods.  Usually  but  one  "materials"  account  is  necessary, 
whether  one  or  more  manufacturing  departments  are  maintained,  except  where 
separate  groups  of  accounts  are  kept  for  each  department.  Materials  account 
the  stores,  or  stock  ledger.  (1(708) 


THE   COST   METHOD   OF  MANUFACTURING   ACCOUNTS 


225 


RULE  FOR  DEBITING  AND  CREDITING    MATERIALS  ACCOUNT  WHEN  THE  COST 

METHOD  is  FOLLOWED. 


706.  Credit  "materials"  account, — 
c.  For  all  materials  taken  from  the  stock- 
room on  requisition  for  work  in  proc- 
ess, called  for  on  requisition  blanks, 
per  transfer  outward  journal,  at  cost. 
(H748) 

For  all  materials  taken  from  the  stock- 
room on  requisition,  when  disposed  of 
by  sale  or  otherwise  than  for  work  in 
process,  at  cost  per  transfer  outward 
journal. 


d. 


705.     Debit  "materials"  account, — 

o.  For  the  cost  of  all  materials  purchased 
which  enter  directly  into  the  goods 
manufactured,  including  freight,  dray- 
age,  and  all  other  charges  necessary  to 
I. lace  the  materials  in  the  stock-room 
rjady  for  use,  as  per  invoice,  or  pur- 
chases journal  or  vouchers  payable 
register.  (^747) 

6.  For  all  materials  returned  to  the  stock- 
roo.n  from  work  in  process  which  had 
been  credited  previously  to  this  ac- 
count, as  shown  on  "stores  returned" 
blanks,  per  transfer  inward  journal. 
-  (H749) 

707.  The  balance  of  the  account  shows  the  cost  of  the  materials  on  hand, 
which  should  equal  the  value  of  the  stock  on  hand  shown  by  inventory  and  by 
the  material,  or  stock  ledger. 

708.  Material,  stock,  or  stores  ledger.     This  is  a  subordinate  ledger,  usually 
kept  by  the  stock  clerk,  of  which  the  materials  account  in  the  general  ledger 
described  above  is  the  controlling  account,  in  which  a  record  is  kept  of  all  materials 
purchased  and  of  all  materials  issued  upon  requisition.    Under  appropriate  head- 
ings, accounts  are  opened  for  each  kind  of  material,  the  number  and  cost  price 
of  the  items  received  being  entered  on  the  debit  side,  and  the  number  of  items 
and  cost  price  of  the  materials  issued  upon  requisition  being  entered  on  the  credit 
side.     The  difference  between  the  number  of  items  of  each  kind  received  and 
issued  must  equal  the  number  of  items  on  hand   in   the   stockroom,  and  the 
difference  betwe'en  the  cost  price  of  the  materials  purchased  and  the  cost  price  of 
the  materials  issued  on  requisition  must  equal  the  balance  shown  by  the  materials 
account  in  the  general  ledger.     Thus,  it  will  be  seen,  two  checks  are  had — one 
from  the  general  ledger  and  another  from  the  inventory.     This  ledger  may  also 
be  used  when  the  department  method  is  followed.    It  receives  its  entries  for  the 
debit  items  from  the  invoice,  or  purchases  journal,  and  from  the  transfer  inward 
journal.     (1f747,  749)     Credits  come  from  the  transfer  outward  journal. 


BOOKKEEPING  AND  ACCOUNTANCY 

WORK  IN  PROCESS. 

709.  "Work  in  process"  is  a  term  used  in  manufacturing  establishments  to 
indicate  all  articles  in  process  of  manufacture.     It  covers  materials  and  direct 
labor  required  for  the  work  in  process,  as  well  as  manufacturing  expenses,  from 
the  time  the  materials  are  received  from  the  store-room  until  the  time  the  finished 
articles  called  for  in  the  order,  job  or  contract  are  delivered  to  the  warehouse, 
sales-room  or  shipping   department.     "Work  in  process,"  therefore,  involves 
three  accounts — "material?  in  process"  account,  "labor"  account  and  "manufac- 
turing expenses"  account. 

MATERIALS  IN  PROCESS. 

710.  "Materials  in  process"  refers  to  the  materials  in  the  work-shop  as 
distinguished  from  the  materials  in  the  store-room.     In  this  account  is  recorded 
the  cost  of  the  materials  used  in  the  orders,  jobs  or  contracts  in  process  which, 
with  the  cost  of  the  labor,  makes  up  the  prime  cost  of  the  goods  manufactured. 

RULE  FOR  DEBITING  AND  CREDITING  "MATERIALS  IN  PROCESS"  ACCOUNT 
WHEN  THE  COST  METHOD  is  FOLLOWED. 

711.    Debit    "materials    in    process"    ac-          712.     Credit    "materials   in   process"    ac- 
count,—  count, — 

a.    For   all   materials   received   from    the          b.    For  all  materials  returned  to  the  stock- 
Btock-room  on  requisition,  at  cost  price,  room,  at  cost  price,  which  were  previ- 

as  shown  by  requisition  orders  per  the  ously  debited  to  this  account,  as  shown 

transfer  outward  journal.     (H748)  on  "stock  returned"  cards  per  the  trans- 

fer inward  journal.  (H749) 
c.  For  the  cost  of  materials  used  on  each 
order,  job  or  contract  when  completed 
and  the  finished  goods  are  ready  for 
sale  or  delivery  or  have  been  placed  in 
warehouse,  as  shown  by  "factory  cost" 
cards  or  job  ledger  per  the  finished  goods 
journal.  (H750) 

713.  The  balance  of  the  account  shows  the  cost  of  the  materials  in  the 
uncompleted  work  in  process,  and  should  equal  the  sum  of  the  charges  for  materials 
on  the  shop  cards  or  job  ledger  for  all  uncompleted  orders,  jobs  or  contracts;  i.e., 
it  should  equal  the  inventory,  and  the  account  should  balance  after  the  inventory 
is  entered.  (^]754b)  This  account,  therefore,  controls  the  charges  for  -materials 
on  °,ost  cards  and  requires  that  all  materials  received  from  the  stock-room 
shall  be  accounted  for. 


THE  COST  METHOD  OF  MANUFACTURING  ACCOUNTS  227 

LABOR. 

714.  Labor,  under  the  cost  method  of  accounts,  is  usually    understood 
to  refer  to  the  labor  which  is  employed  directly  in  the  manufacture  of  a  particular 
order,  job  or  contract.      This  is  known  as  direct*  labor,  to  distinguish  it  from 
indirect  labor,  which  is  a  part  of  factory  expense  and  will  be  described  under 
factory  expense  account.     It  is  the  labor  which,  added  to  cost  of  materials, 
gives  the  prime  cost.     (H664)     The  account  is  kept  under  the  head  of  "labor," 
or  "productive  labor"  account,  and  should  be  distinguished  from  accounts  under 
similar  names  described  in  H563  and  ^[697. 

715.  Pay-roll  and  time  cards.    These  are  described  in  ^[696.    The  time 
of  each  workman  is  kept  by  the  foreman  or,  in  large  establishments,  by  a  time 
clerk,  although  in  some  concerns  the  workman  himself  makes  the  record  of  his 
time  and  the  purpose  for  which  it  was  expended,  in  which  case  the  time  card 
should  be  O.K.'d  by  his  foreman.     It  is  from  the  time  cards  that  the  time  expended 
on  each  order,  job  or  contract  is  entered  on  the  cost  card  or  in  the  job  ledger, 
whichever  is  kept,  and  it  is  from  the  same  cards  that  the  pay-roll  is  made  up, 
usually  weekly  or  monthly,  or  as  frequently  as  the  workmen  are  paid. 

RULE  FOR  DEBITING  AND  CREDITING  PRODUCTIVE,  OR  DIRECT  LABOR  ACCOUNT 
WHEN  THE  COST  METHOD  is  FOLLOWED. 

716.     Debit  "labor"  account,—  717.    Credit  "labor"  account,— 

o.    For  all  sums  paid  to  workmen,  in  cash          6.    For  all  direct  labor  expended  on  goods 
or  its  equivalent,  for  direct  labor,  as  completed,   manufactured  during    the 

shown  by  the  pay-roll  or  time  cards.  period,   as  shown  by  the  factory  cost 

cards,  per  the  finished  goods  journal. 

718.  The  balance  of  the  account  shows  the  amount  of  labor  which  has 
been  expended  on  uncompleted  work  in  process,  which  should  equal  the  sum  of 
the  items  for  direct  labor  on  the  cost  cards  of  uncompleted  work,  i.e.,  should 
equal  the  present  inventory.  (^]754c)  This  account,  therefore,  controls  the 
charges  for  direct  labor  on  the  cost  cards,  and  requires  that  all  time  charged  on 
the  pay-roll  be  accounted  for. 

*Direct  labor  is  so  named  because  it  is  expended  directly  on  a  particular  article  or  job. 
Indirect  labor,  on  the  other  hand,  is  labor  that  is  general  in  its  character  and  cannot  be 
connected  with  any  particular  article  or  job,  such  zs  cleaning  shop,  distributing  tools,  etc. 


228 


BOOKKEEPING   AND   ACCOUNTANCY 


MANUFACTURING  EXPENSES. 

719.  "Manufacturing  expenses"  is  a  term  used  to    designate  the  actual 
expenses  chargeable  against  work  in  process  on  shop  cards  while  the  work  is 
going  through  the  work-shop  in  course  of  manufacture  or  when  completed,  to 
distinguish  them  from  factory  expenses,  which  are  included  in  a  general  account 
described  in  ^[732.     When  the  "scientific  machine  rate,"  the  "productive  fac- 
tor," or  the  "productive  center"  method  is  used  for  the  distribution  of  manu- 
facturing expenses  (burden  and  overhead),  this  account  may  be  designated  under 
the  title  of  "factors  expense"  account.     When  any  one  of  these  methods  is  used, 
the  hourly  machine  or  productive  factor  charges  are  usually  made  concurrently  on 
cost  cards  with  the  charges  for  materials  and  labor,  and  when  added  to  cost  of 
materials  and  labor  give  the  factory  cost  or  cost  of  production.     (1[664)      When 
other  methods  for  distributing  manufacturing  expenses  are  employed,  they  are 
not  charged  to  the  order,  job  or  contract  until  it  has  been  completed  and  the  total 
labor  time,  labor  cost  or  material  cost  has  been  determined. 

720.  Estimates   of   manufacturing   expenses,    usually  based  upon  the  cost 
of  these  expenses  for  previous  periods,  are  required  to  ascertain  the  amount  of 
these  expenses  which  is  to  be   distributed  for  the  present  period.     Such  an  esti- 
mate is  known  as  a  schedule  or  inventory  of  expenditures,  and  is  usually  made 
up  at  the  beginning  of  each  succeeding  period.     It  is  frequently  designated  as  the 
"manufacturing  expense  budget,"  and  is  made  up  of  all  the  various  burden  and 
overhead  expenses  which  are  to  be  included  in  the  cost  of  manufacture  and  dis- 
tributed over  the  various  jobs,  orders  or  contracts  for  the  period.     When  the  esti- 
mated manufacturing  expenses  for  a  given  period  have  been  determined,  they  are 
then  divided  by  the  number  of  monthly  periods  included  in  the  estimate.  (11752) 


RULE  FOR  DEBITING  AND  CREDITING  MANUFACTURING,  OR  FACTOKS 
EXPENSE  ACCOUNT. 


721.    Debit    '•manufacturing,"    or    "fac- 
tors" expense  account, — 

a.  For  the  estimated  amount  of  manufac- 
turing expenses,   at  cost,  for  the  week, 
month  or  other  period,  per  schedule  at 
commencement  of  period.      (11720,  752) 

b.  For  such  an  amount  as  will  meet  the  de- 
ficit caused  by  an  under -estimate  of  ex- 
penses for  the  period  or  for  the  amount 
necessary  to  provide  for  the  supplemen- 
tary rate    to  be  charged  to    work   in 
process. 


722.     Credit   "manufacturing/'    or    "fac- 
tors" expense  account, — 

c.  For  the  amount  of  manufacturing  ex- 
penses, at  cost,  distributed  and  charged 
to  orders,  jobs  or  contracts  as  they  are 
in  process,  or  when  completed  during 
the  period,    as  shown  by  factory  cost 
cards,     per     finished     goods     journal. 
(H750) 

d.  For  such  an  amount  as  will  equai  an 
overcharge  to  the  account  caused  by 
an  over-estimate  of  the  expenses  for  the 
period,  transferred  to  following  period. 


THE   COST   METHOD    OF   MANUFACTURING   ACCOUNTS  389 

723.  The  balance  of  the  account,  shows  the  cost  of  the  manufacturing  ex- 
penses that  have  been  charged  or  are  yet  to  be  charged  on  the  cost  cards  of  the 
various  unfinished  orders,  jobs  or  contracts,  at  the  close  of  the  period,  i.e.,  it 
should  equal  the  inventory  of  this  account.  (^]754d)  Any  difference  between 
the  balance  of  the  account  and  the  inventory  will  show  an  over-  or  under-estimate 
of  manufacturing  expenses  for  the  period  —  an  over-estimate  if  the  balance  is 
the  larger,  an  under-estimate  if  the  inventory  is  the  larger. 

723a.  Items  *721a,  b,  may  be  and  frequently  are  omitted  by  omitting  the 
entry  from  the  manufacturing  expense  estimate  book  debiting  manufacturing 
or  factors  expense  account  and  crediting  factory  expense  account  for  the  estimated 
expenses  for  the  month  or  other  period.  (Read  Y752) 


//  the  entries  required  for  7%la,  b,  are  omitted  the  balance  will  then 
show  the  cost  of  the  factory  expenses  distributed  for  the  period.  This  balance 
should  substantially  equal  the  balance  shown  by  its  contra  account,  "factory  ex- 
pense" account,  described  in  H736,  when  the  items  called  for  in  ^735d  are  omitted. 
Any  difference  would  show  over-  or  under-distribution  of  manufacturing  expenses, 
described  in  ^[723. 

724.  If  manufacturing  expenses  are  distributed  through  hourly  machine, 
productive  factor,  or  productive  center  time,  in  which  case  the  account  should 
be  kept  under  the  title  of  "Factors  Expense"  (^[719),  the  balance  of  the  account 
will  include  the  value  of  the  idle,  or  unproductive  time  of  machine  factors  or 
centers,  unless  the  idle  time  has  been  distributed  monthly  in  the  supplementary 
rate.     This  idle  time  may  be  accounted  for  by  a  daily  shop  record  of  the  idle 
time  of  each  machine,  factor  or  center,  in  a  separate  book  kept  for  that  purpose, 
which  should  be  totaled  for  the  month.     This  total  is  an  unfailing  barometer  of 
the  productive  efficiency  of  the  plant.     (1[684/z)     The  difference  between  this 
total  and  the  balance  (inventory)  of  the  account  will  show  that  part  of  the  manu- 
facturing expenses  coming  from  other  sources  than  idle  time  which  is  yet  to  be 
distributed. 

725.  Under-estimates  of  manufacturing  expenses  (^7216)  must  be   dis- 
tributed as  a  supplementary  charge  over  the  work  in  process  for  the  period,  or  it 
may  be  carried  into  the  next  period,  with  a  corresponding  increase  of  the  charges 
on  the  goods  manufactured  in  that  period;   otherwise,  they  represent  a  dead  loss 
to  the  concern.     Over-estimates,  on  the  other  hand  (*[\722d),  have  the  advantage 
of  creating  a  reserve,  which  can  be  carried,  forward  to  subsequent  periods,  with 
corresponding  reductions  in  the  charges  against  the  goods  then  in  process  of  manu- 
facture.    Either  extreme  should  be  avoided,  if  possible.     (^[684/i,  i) 


230  BOOKKEEPING  AND  ACCOUNTANCY 

MANUFACTURING  ACCOUNT. 

726.  The  three  preceding  accounts,  viz.,  "materials  in  process,"  "produc- 
tive labor,"  and  "manufacturing  expense"  accounts,  may  be  combined  and  kept 
as  one  account,  under  the  title  of  "manufacturing  account,"  in  which  case  the 
various  elements  of  cost  shown  in  the  separate  accounts  may  be  ascertained  from 
an  analysis  sheet  made  up  from  the  single  account.  The  accounts  are  kept 
separately  to  provide  control  accounts  that  will  give  an  absolute  check  upon 
the  records  kept  of  material,  labor  and  expenses  of  the  factory,  and  to 
guard  against  loss  of  materials  through  neglect  to  charge  them  or  by  theft,  for 
loss  of  labor  time  through  neglect  to  charge  or  caused  by  idleness  of  workmen,  and 
to  quickly  discover  inaccuracies  in  prorating  burden  and  overhead  expenses. 

RULE  FOB  DEBITING  AND  CREDITING  MANUFACTURING  ACCOUNT,  COMBINING 
MATERIALS  IN  PROCESS,  PRODUCTIVE  LABOR  AND  MANUFACTURING  EX- 
PENSES. 

727.     Debit    'manufacturing"   account, —  728.     Credit   "manufacturing"  account,— 

fl«     For  cost  of  all  materials.     (1f711a)  e.     For  cost  of  materials  returned  to  stock- 

6.     For  cost  of  all  direct  labor.  room.     (1f712&) 

C.    For  estimated  cost  of  manufacturing  ex-        .   /.     For  cost  of  materials  in  finished  goods. 

penses  for  the  period.     (f721a)  (f712c) 

d.    For  cost  of  manufacturing  expenses  dis-  g .     For  cost  of  direct  labor  in  finished  goods, 

tributed    through    the    supplementary  (^7176) 

rate.     (If 7216)  h.    For    cost    of   manufacturing  expenses 

charged  to  finished  goods.  (H722c) 
i.  The  balance  of  this  account  consists  of: 
(a)  the  cost  of  the  materials  in  process 
of  manufacture  (1f7l3);  (6)  the  cost  of 
direct  labor  expended  on  uncompleted 
work  in  process  (1f7l8) ;  and  (c)  the  cost 
of  manufacturing  expenses  charged  or  to 
be  charged  to  work  in  process.  (^723) 

729.  The   balance   shows  the  cost  of    materials,   productive    labor  and 
manufacturing   expenses   included   in    the    work    in    process   not    completed. 
If  manufacturing  expenses  are  distributed  through  hourly  machine,  productive 
factor,  or  productive  center  time,  the  balance  will  include  the  value  of  unpro- 
ductive machine  hours,  factors,  or  centers.     (1(724) 

730.  When  the  estimated  manufacturing  expenses  are  not  charged  to  this 
account  (1[727c),  the  balance  of  the  account  will  show  the  amount  of  manufac- 
turing expenses  distributed,  including  the  value  of  idle  machine  time,  although 
the  balance  may  also  contain  inaccuracies  relating  to  the  materials  and  labor,  which 
would  be  revealed  only  through  an  analysis  of  the  account,  which  would  virtually 
separate  it  into  the  three  accounts  indicated. 


THE   COST   METHOD   OP   MANUFACTURING   ACCOUNTS  231 

731.  Shop  cards  and  job  ledger.    Shop  cards  accompany  each  order,  job  or 
contract  during  the  time  the  work  is  in  process,  and  receive  entries  for  all  items 
of  material,  labor  and  other  direct  charges  that  belong  to  the.  work  called  for  on 
the  cards,  and  also  for  the  charges  covering  burden  and  overhead  expenses  when 
these  costs  are  recorded  concurrently  with  the  charges  for  materials  and  labor. 
On  small  jobs,  these  cards  are  frequently  bound  in  loose-leaf  style  or  indexed  by 
one  of  the  many  card  systems.     Where  there  are  many  items  entering  into  the 
cost  of  the  product  it  is  necessary  to  keep  a  job  ledger,  for  which  the  loose-leaf 
ledger  form  is  usually  preferred.     In  any  event,  the  card  or  ledger  account  finally 
shows  the  total  cost  of  materials,  labor  and  other  direct  charges  entering  into  the 
cost  of  the  finished  product,  and  also  the  cost  of  burden  and  overhead  expenses 
whether  charged  concurrently  with  materials  and  labor  by  the  machine  rate 
method  or  not.     There  are  many  forms  of  ruling  and  arrangement  for  the  cards 
and  stock  ledger  accounts,  the  design  being  determined  by  the  organization  of 
the  shop  processes  and  the  system  of  accounts.     Shop  cards  and  job  ledgers  may 
also  be  used  when  the  department  method  of  conducting  manufacturing  accounts 
is  followed. 

FACTORY  OR  SHOP  EXIENSES. 

732.  These  expenses  are  described  and  the  principal  items  enumerated  in 
K645,  page  201.     It  should  be  noted  that  they  do  not  include  either  material  or 
direct  labor,  which  are  charged  to  their  own  accounts,  but  that  they  do  include 
incidental  labor  and  supplies,  as  well  as  all  other  items  of  factory  expense  which 
enter  into  the  cost  of  production.     (Read  1(657,  1(658)     While  a  single  expense 
account  is  usually  kept  for  factory  expenses,  they  may  be  classified  to  any  extent 
desired  by  opening  separate  accounts  for  each  class  of  items,  or  they  may  be 
classified  on  an  analysis  sheet,  either  monthly  or  at  the  close  of  the  fiscal  period. 

733.  A  sharp  distinction  should  be  made  between  factory  expense  account, 
here  described,  and  manufacturing,  or  factors  expense  account,  described  in  H719  to 
11725.     Factory  expense  account  receives  the  charges  for  the  current  expenses  of 
the  factory,  shop  or  works,  and  it  corresponds  in  principle  with  the  general 
expense  account,  described  in  1[310to  1f324,  while  manufacturing,  or  factors  expense 
account  shows    these  expenses  distributed  over  the  manufactured  product;   conse- 
quently it  will  be  seen  that  the  items  debited  to  factory  expense  account  are 
finally  credits  to   the  manufacturing,  or  factors  expense  account.    All  items 
credited  to  manufacturing  expense  account  in  the  finished  goods  journal  (1(750) 
might  be  credited  directly  to  factory  expense  account,  but  it  would  have  the 
result  of  confusing  such  items  with  credits  in  the  account  from  other  sources,  and 
besides,  it  would  make  factory  expense  account  show  two  results  instead  of  one, 
which  is  always  objectionable  and  in  opposition  to  one  of  the  well-established 
rules  of  accountancy. 

43265 


232 


BOOKKEEPING   AND   ACCOUNTANCY 


RULE  FOR  DEBITING  AND  CREDITING  FACTORY  EXPENSES. 


734.  Debit  "factory  expenses,"  under  ap- 
propriate headings, — 

a.  For  the  cost  of  all  indirect  labor  and  sup- 
plies entering  into  the  cost  of  goods 
manufactured. 

6.  For  the  cost  of  rent,  fuel  and  light,  pow- 
er, taxes,  insurance,  maintenance,  re- 
pairs and  renewals,  depreciation,  and 
such  other  expenses  as  are  incurred  in 
carrying  on  the  work  of  the  shop  or 
factory. 


735.    Credit  "factory  expenses,"  under  ap- 
propriate headings, — 

c.  For    any  deductions  or  rebates   from 
items  charged  to  this  account. 

d.  For  the  estimated  amount  of  "manu- 
facturing," or  "factors"  expenses  for  a 
given  period,  charged  to  those  accounts 
when  they  are  kept.     (H721a) 

e.  For  expense  items  previously  charged 
to  this  account  transferred  to  otheSr  ac- 
counts. 


736.  The  balance  (or  the  sum  of  the  balances  if  more  than  one  account  is 
opened),  shows  the  over-  or  under-distribution  of  manufacturing,  or  factors  ex- 
penses.    (11724,  1725)     //  items  in  ^735d  are  not  credited  to  this  account  (read 
1[723&),  then  the  balance  of  this  account  should  substantially  equal  the  balance 
shown  by  its  contra   account,  the  manufacturing,  or  factors  expense  account 
(1721,  ^722),  the  difference  between  the  balances  showing  the  over  or  under-dis- 
tribution of  factory  expenses. 

737.  Each  factory  expense  account  in  a  cost  system  is  usually  accompanied 
by  a  complementary  or  contra  account,  which  shows  the  debit  items  of  one  account 
as  the  credit  items  of  the  other,  as  indicated  in  the  preceding  paragraph.     For 
instance,  manufacturing,  or  factors  expense  account  is  the  contra  account  to  fac- 
tory expense  account  and  is,  therefore,  an  offset  account  to  it.     As  has  already  been 
suggested,  the  transfer  entry  between  these  accounts  may  be  omitted,  in  which 
case  the  balances  should  practically  cancel  each  other. 

738.  Prorating   and    distributing   general   and   administrative   expenses. 
Apart  from  and  in  addition  to  factory  expenses,  or  burden,  which  with  the  cost 
of  material  and  labor,  gives  the  total  factory  cost  (see  formula  1664),  there  are 
usually  certain  other  items  of  expense  incurred  known  as  overhead  expenses. 
(Read  1654,  11658)    These  overhead  expenses  must  not  be  confused  with  the 
regular  administrative  and  general  expenses  incurred  in  the  general  or  financial 
management  of  the  concern,  and  which  correspond  in  every  particular  with  those 
of  a  trading  business,  as  set  forth  in  1297,  H301, 1(302,  1310,  H314and  1315;  and  it 
should  be  noted,  also,  that  they  rarely  comprise  more  than  a  small  proportion  of 
the  items  charged  to  the  administrative  and  general  expense  accounts,  and  that  in 
all  instances  where  it  is  possible,  they  should  be  charged  directly  to  the  factory 
expense  account  and  should  never  appear  in  the  general  or  administrative  expense 
accounts,  in  which  case,  of  course,  their  consideration  as  separate  items  in  the 
distribution  of  expense  is  unnecessary.     (Read  1[658  to  1663) 


THE   COST  METHOD   OF   MANUFACTURING   ACCOUNTS  233 

739.  When  factory  expenses  are  charged  in  general,  or  administrative 
expense  accounts,  or  when  some  proportion  of  general  or  administrative  expenses 
are  to  be  included  as  part  of  the  cost  of  production  of  goods  manufactured,  their 
amount  should  be  ascertained  and  included  in  the  schedule,  or  inventory,  of 
manufacturing  expenses  for  the  period.     (1(720)     When  it  is  desired  to  show 
separately  such  general  or  administrative  expense  items  as  have  been  thus  dis- 
tributed, it  is  necessary  to  open  contra  accounts  similar  to  rhe  contra  account  for 
the  factory  expense  account  or,  preferably,  they  should  be  listed  separately  and 
charged  by  journal  entry  to  the  factory  expense  account  and  credited  to  the  proper 
general  or  administrative  expense  account. 

740.  Manufactured  goods  consist  of  the  articles  which  have  been  completed 
and  delivered  ready  for  sale  to  the  shipping  department  or  for  storage  in  the  ware- 
house.    An  account  with  manufactured  goods  is  kept  under  the  title  of  "  Finished 
Goods"  (usually  abbreviated  to  "Fin.  Goods")  or  "Manufactured  Goods." 

RULE  FOR  DEBITING  AND   CREDITING   FINISHED   GOODS  ACCOUNT. 

741.     Debit  "finished  goods"  account, —  742.     Credit  "finished  goods"  account, — 

a.     For  the  cost  of  goods  manufactured  dur-  b.     For  the  cost  of  goods  sold  for  the  month 

ing  the  period,  at  cost  of  production,  or  other  period,  per  "cost  of  sales"  rec- 

i.e.,  cost  of  materials,  labor  and  manu-  ord,    stock    delivery  orders,    etc.,   pei 

facturing   expense    (burden   and   over-  stock  deliveries  journal.     (1f75l) 

head),  as  shown  on  cost  cards  for  each  c.     The   inventory  consists  of   the  finished 

order,  job  or  contract  when  completed,  goods  on  hand,  at  cost, 
per  finished  goods  journal.  ( 11750) 

743.  The  balance  of  the  account  equals  the  total  cost,  or  inventory  value  oj 
the  manufactured  goods  in  stock,  as  shown  by  inventory  or  by  the  stock  ledger, 
when  kept.     This  account,  therefore,  controls  the  finished  goods,  or  stock  ledger. 
The  total  footing  of  the  account  for  the  year  or  other  period,  after  the  inventory 
for  the  previous  period  has  been  deducted,  shows  the  total  cost  of  the  goods  manu- 
factured for  the  period. 

744.  After  the  process  of  manufacture  has  been  completed  and  the  finished 
goods  have  been  charged  to  that  account,  cost  of  production  ends   (H664) 
and  selling,  administrative  and  general  expenses  begin.     It  is,  therefore,  at  this 
point  that  the  manufacturing  statement  ends  and  the  trading  statement  begins. 
The  connection  between  the  manufacturing  accounts  and  the  trading  accounts 
is  through  the  entry  debiting  cost  of  sales  account  for  the  cost  of  the  goods 
sold  and  crediting  finished  goods  account,  mentioned  in  ^7426 


234  BOOKKEEPING  AND   ACCOUNTANCY 

745.  "Cost  of  goods  sold,"  or  "cost  of  sales"  account  is  debited  for  the  cost  of  the 
manufactured  goods  sold.  It  is  an  offset,  or  contra  account,  to  the  sales  account, 
the  difference  between  them  showing  the  trading  profit  for  the  period.  The  debit 
to  this  account  is  invariably  the  credit  to  finished  goods  account,  as  previously 
stated.  Its  only  purpose  is  to  eliminate  the  cost  of  goods  sold  from  the  sales 
account,  so  that  its  debit  footing  will  show  only  those  items  called  for  in  ^[159a,  b,c. 
Various  methods  for  recording  costs  of  goods  sold  are  employed.  One  is  to  enter 
both  cost  and  selling  price  on  orders,  from  which  the  cost  price  is  tabulated  for 
the  period;  another  is  to  enter  the  cost  price  of  each  article  sold  in  the  sales  book, 
or  on  sales  ticket,  their  sum  being  the  total  cost  of  the  goods  sold  for  the  period; 
the  third  is  to  make  up  a  similar  record  from  stock  delivery  orders.  An  entry  for 
the  month  or  period,  debiting  sales  account  and  crediting  finished  goods  account, 
is  required.  The  sales  account  of  a  manufacturing  concern  is  in  every  respect 
similar  to  the  sales  account  of  a  trading  business,  described  in  H156  to  If  169  of  this 
text.  To  eliminate  an  extra  account,  sales  account  may  be  debited  for  the  cost 
of  goods  sold,  instead  of  "cost  of  goods  sold"  account  as  stated.  The  difference 
between  the  two  sides  of  the  sales  account  would  then  show  the  gross  trading 
profit  for  the  period. 

746.  The  various  manufacturing  accounts,  as  has  already  been  stated  under 
the  several  accounts,  are  connected  with  each  other  and  with  the  factory  cost 
accounts  kept  in  subordinate  ledgers  and  other  account  books  of  the  factory, 
shop  or  works,  which  they  control,  through  a  series  of  entry  books,  variously 
designated  as  journals,  or  books,  the  name  "journal,"  seeming  to  have  the  prefer- 
ence among  accountants.     These  journals  are  as  follows: 

747.  Invoice,  or  purchases  journal.    This  book  receives  the  entries  for  all 
materials  purchased,  whether  raw  or  partly  manufactured,  which  enter  directly 
into  the  manufactured  product,  including  freight  and  drayage  and  all  other  charges 
necessary  to  place  the  material  in  the  stock-room  ready  for  use.     (H705a)    The 
entries  are  made  from  the  invoices,  and  the  freight,  drayage,  and  other  bills 
received.     The  total  footing  is  debited  to  materials  account  and  credited  to 
accounts  payable  in  the  general  ledger,  the  various  items  being  debited  in  the  mate- 
rials, stock,  or  stores  ledger,  as  described  in  H708.     When  the  voucher  system 
for  recording  purchase  accounts  is  used,  the  debit  to  materials  account  is  made 
from  the  vouchers   payable  register,    which,  of  course,  eliminates  a  separate 
purchases  ledger  which  would  otherwise  be  kept. 


THE   COST   METHOD    OF   MANUFACTURING   ACCOUNTS  235 

748.  Transfer  outward  or  requisition  journal.     All  materials  taken  from 
stock  on  requisition,  for  work  in  process,  are  entered  in  this  book  from  the  requi- 
sition blanks,  at  cost.     The  total  footing  for  the  month  is  debited  to  materials  in 
process  account  (1[711a)  and  credited  to  materials  account  (^706c),  while  the 
items  are  credited  to  the  proper  accounts  in  the  material,  stock,  or  stores  ledger. 
(H708)     When  a  single  manufacturing  account  is  kept  (H726),  the  total  looting 
is  debited  to  that  account.     (1]727a) 

749.  Transfer  inward  journal.    In  this  book  is  recorded   from  "stock 
returned"  cards,  all  entries  for  materials  returned  to  the  stock,  or  stores  room, 
at  cost  price,  which  were  previously  credited  to  materials  account.     The  total 
footing  for  the  month  is  debited  to  the  materials  account  in  the  general  ledger 
(1[705&)  and  credited  to  materials  in  process  account.     (H7126)     The  separate 
items  are  debited  to  the  proper  accounts  in  the  materials,  stock,  or  stores  ledger, 
at  cost  price.     (H708) 

750.  Finished  goods  journal.    When  each  order,  job  or  contract  Is  com- 
pleted and  the  finished  goods  are  ready  for  sale  or  have  been  placed  in  warehouse, 
an  entry  is  made  in  this  book  from  the  factory  cost  cards,  or  job  ledger,  on  which 
have  been  entered  and  totaled  the  separate  costs  of  material,  direct  labor,  and  man- 
ufacturing expenses.     This  journal  should,  therefore,  contain  columns  to  receive 
these  items.     At  the  end  of  the  month,  the  footing  of  the  total  column  is  posted 
to  the  debit  of  finished  goods  account  (^[74 la),  while  the  footings  of  the  credit 
columns  are  posted  to  the  credit  of  materials  in  process  account  (H"712c),  labor 
account  (1J717&),  and  manufacturing,  or  factors  expense  account  (1[722c)     When 
a  single  manufacturing  account,  combining  these  credit  accounts,  is  kept,  they 
are  credited  to  that  account.     (1J728/,  h,  g) 

751.  Stock  deliveries  journal.    When  this  book  is  kept,  it  is  necessary  to 
enter  only  the  numbers  of  the  stock  delivery  orders  Of  sales  tickets,  and  the  total 
cost  of  production  price  of  each  article,  which  may  be  taken  from  the  original 
cost  cards  for  the  article  or  from  the  job  ledger.     The  total  for  the  month  is  posted 
to  the  debit  of  cost  of  sales  account  or  to  the  debit  of  sales  account,  when  that 
account  is  not  kept.     (^745)     It  is  credited  to  finished  goods  account.     (H7426) 

752.  Manufacturing  expense  estimate  book.    In  this  book  is  entered,  at  the 
beginning  of -each  period,  the  estimated  cost  of  each  factory  expense  for  the  period 
covered  in  the  estimate,  which  may  be  for  the  fiscal  year  or  for  a  quarter  or  month. 
(H720)    The  cost  of  these  expenses  is  based  largely  upon  the  actual  expenses  of 
previous  similar  periods,  with  such  changes  as  may  be  necessary.     The  total  of 
these  factory  expenses  equals  the  total  manufacturing  expense  which  is  to  be 
distributed  over  the  work  of  the  period  then  beginning,  by  one  or  the  other  of  the 


236  BOOKKEEPING   AND   ACCOUNTANCY 

methods  employed.  (*[678,  ^[679)  It  should  be  divided  into  monthly  amounts 
which  should  be  debited  to  manufacturing,  or  factors  expense  account  (If 72 la) 
and  credited  to  factory  expense  account.  (^f735d)  %If  no  entry  is  made  of  the 
estimated  monthly  manufacturing  expenses,  as  suggested  in  ^[723a,  H736,  it  should 
be  carefully  compared  monthly  with  the  balance  shown  by  the  manufacturing, 
or  factors  expense  account,  as  well  as  with  the  balance  shown  by  the  factory 
expense  account.  Varying  conditions  shown  by  idle  productive  factors  caused 
by  decreased  production,  labor  troubles,  overtime,  and  the  various  other  elements 
affecting  manufacturing  costs,  will  usually  require  frequent  changes  to  be  made 
in  the  monthly  estimate  of  manufacturing  expenses  (burden  and  overhead). 
This  book,  therefore,  is  of  great  importance  in  the  efficient  and  economical  adminis- 
tration of  a  manufacturing  business. 

SERI-ES  OF  ENTRIES  ILLUSTRATING  THE  ROUTINE  FOR  DEBITING  AND  CREDITING 
ACCOUNTS  UNDER  THE  COST  METHOD,  FROM  THE  TIME  MATERIALS  ARE 
PURCHASED  UNTIL  THE  FINISHED  PRODUCT  is  SOLD. 

753.     Each  step  in  the  usual  course  of  procedure  in  manufacturing  is  indi- 
cated in  the  following  entries: 

a.     When  materials  are  purchased  to  be  used  up  in  the  manufacture  of  goods,  the  following 
accounts  are  debited  and  credited  in  the  invoice,  or  purchases  journal  (^[747): 
"Materials,"  E>r.  (1]705a)  For  cost  of  all  materials,  including  trans- 

" Accounts  Payable,"  Cr.  portation  and  other  charges  necessary 

to  place  the  materials  in  the  stock-room 
ready  for  use. 

.    b.    When  materials  are  taken  from  the  stock-room  on  requisition,  for  use  in  the  work-shop, 
the  following  accounts  are  debited  and  credited  in  the  transfer  outward  journal  ( 11748)  : 
"Materials  in  Process,"  Dr.   (1f711a)  For  the  cost  price  of  all  materials  re- 

"Materials"  Cr.   (l|706c)  ceived  from  the  stock-room. 

c.  When  unused  materials  are  returned  to  the  stock-room,  the  following  accounts  are 
debited  and  credited  in  the  transfer  inward  journal  (1J749) : 

"Materials,"  Dr.   H7056)  For  unused  material  returned  to  the 

"Materials  in  Process,"  Cr.   (1(7126)  stockroom,  at  cost  price. 

d.  When  the  daily,  weekly  or  monthly  pay-roll  is  made  up,  the  accounts  debited  and  cred- 
ited from  the  pay-roll,  time  book  or  a  list  of  the  time  cards,  are  as  follows : 

"Labor,"  Dr.  (1f716a)  For  direct  labor. 

"Factory  Expense,"  Dr.  (H734a)  For  indirect  labor. 

"Cash,"  Cr.  (or)  When  paid  in  cash. 

"Vouchers  Payable,"  Cr.  (or)  When  the  voucher  system  is  used  and 

voucher  is  issued  for  pay-roll. 

"Pay-Roll"  Cr.  When  such  an  account  is  kept  for  pur- 

pose described  in  If563. 

NOTE.— The  proper  account  to  be  credited  in  connection  with  the  pay-roll  depends 
upon  the  system  of  accounts  followed. 


THE   COST   METHOD   OF  MANUFACTURING  ACCOUNTS  237 

e.  When  orders,  jobs  or  contracts  are  completed  and  the  finished  goods  are  ready  for 
sale  or  have  been  placed  in  wa^en/mse,  and  ^ie  burden  and  overhead  expenses  have  been  pro- 
rated and  distributed  on  factory  cofst  cards  or  job  ledger,  and  the  total  cost  of  production,  or 
"cost  to  ma,ke,"  has  been  determined,  the  following  accounts  are  debited  and  credited  in  the 
finished  goods  journal  (^[750): 

"Finished  Goods,"  Dr.     (1f741a)  For  the  cost  of  materials,  direct  labor, 

"Materials  in  Process,"  Cr.     (H712c)  and  of  burden  and  overhead  charges  en- 

"  Labor,"  Cr.     (H7176)  tering  into  the  total  cost  of  production. 

"Manufacturing,"     or     "Factors    Ex- 
pense"   Cr.      (H722c) 

/.  When  manufactured  goods  are  sold,  the  following  accounts  are  debited  an^l  credited: 
"Accounts  Receivable,"  Dr.  For  the  selling  price  of  the  goods  sold. 

"Sales,"  Cr. 

g.     When  the  cost  of  the  goods  sold  is  determined  at  the  end  of  the  month,  the  following 
accounts  are  debited  and  credited  in  the  stock  deliveries  journal  (1f751): 
"Cost  of  Sales,"  Dr.      (H745)  For  the  cost  of  the  goods  sold. 

"Finished  Goods,"  Cr.     (17426) 

h.  When  a  "cost  of  sales"  account  is  not  kept,  sales  account  is  debited  in  the  foregoing 
transaction  instead  of  "cost  of  sales"  account.  (TT745) 

753a  In  addition  to  the  routine  entries  outlined  in  the  preceding  paragraphs,  there  are  a 
number  of  other  en  tries,  which  may  be  made  necessary  when  there  is  a  departure  from  the  usual 
routine  in  the  manufacturing  processes;  for  instance,  it  is  not  unusual  in  manufacturing  estab- 
lishments, during  dull  seasons  or  when  work  is  slack  in  any  department,  to  partly  manufacture 
or  complete  stock  parts  or  materials  ahead  of  the  time  when  they  are  required  for  the  comple- 
tion of  articles,  by  doing  such  machine  or  other  work  upon  them  as  opportunity  will  permit. 
When  this  is  done,  an  order  is  prepared,  the  materials  are  requisitioned,  at  cost  price,  from  the 
stock-room,  and  the  manufacturing  process,  whatever  it  may  be,  proceeds  exactly  as  though 
they  were  to  be  at  once  completed,  the  productive  labor  and  burden  being  charged  as  usual. 
When  the  work  is  carried  as  far  as  possible  or  until  it  is  found  necessary  to  discontinue  it,  the 
cost  cards  are  made  up  for  whatever  work  has  been  accomplished,  and  the  new  cost  price  deter- 
mined, when  the  materials  or  parts  are  returned  to  the  stock-room.  When  this  is  done,  the  entry 
shown  in  ^  753e  would  be  made,  at  the  new  cost  price,  except  that  materials  account  would 
be  debited  instead  of  finished  goods  account,  and  the  entry,  of  course,  would  be  made  in  the 
general  journal  instead  of  in  the  finished  goods  journal. 

(6)  Another  instance  is  where  finished  parts  or  materials  in  the  stock -room  are  sold  as 
in  the  case  of  automobile  or  other  machine  parts.  Wh'le  the  article  would  be  credited  to  sales 
account  at  selling  price,  it  must  be  credited  to  materials  account  at  cost  price,  which  would 
require  a  general  journal  entry,  debiting  cost  of  goods  sold  account  and  crediting  materials 
account  to  adjust. 

(c)  A  third  illustration  is  where  finished  parts  or  articles  that  have  been  charged  to  fin- 
ished goods  account  and  placed  in  the  sales-room  or  warehouse,  are  returned  to  the  work -shop 
to  be  used  for  the  completion  of  some  other  article;  for  instance,  where  finished  valves,  oil 
cups  or  the  like  are  used  in  the  completion-of  an  engine  in  process  of  building.  In  such  cases, 
materials  in  process  should  be  debited  and  finished  goods  credited,  at  the  total  factory  cost 
of  the  article,  through  the  general  journal  or  through  a  special  journal  kept  for  that  purpose. 
Other  transfers  of  materials  or  products  in  various  stages  of  manufacture,  outside  of  the  usual 
routine,  may  require  corresponding  entries,  which  may  be  easily  determined  by  a  consideration 
of  the  accounts  involved. 


238  BOOKKEEPING   AND   ACCOUNTANCY 

754.  Inventories  of  manufacturing  accounts.  Separate  inventors  are 
required  of  materials,  (^]706e)  materials,  in  process,  (f712c)  labor,  (^]717c)  manu- 
facturing expenses,  (^[722e)  factory  expenses,  (H735/)  and  finished  goods. 
(1]742c)  prior  to  the  preparation  of  the  manufacturing  statement.  These  inven- 
tories are  invariably  taken  at  cost  price. 

a.  The  materials  inventory  consists  of  a  list  of  the  materials  on  hand  in  the  stock,  or  stores 
room,  taken  at  cost  price,  which  must  agree  with  the  accounts  in  the  stock,  or  stores  ledger  or 
on  cards.    Where  purchases  of  the  same  article  are  made  at  different  prices,  the  average  price 
must  be  ascertained  or  separate  accounts  for  different  prices  may  be  opened. 

b.  The  materials  in  process  inventory  is  made  up  from  the  cost  cards  or  from  the  job  ledger 
for  each  of  the  orders,  jobs  or  contracts  which  are  uncompleted.    Where  the  materials  were 
purchased  at  different  times  at  different  prices,  the  average  price  for  the  materials  in  each  order, 
job  or  contract  must  be  ascertained,  or  separate  accounts  may  be  kept  with  the  same  items 
at  different  prices. 

c.  The  labor  inventory  consists  of  the  direct  labor  on  uncompleted  orders,  jobs  or  con- 
tracts, made  up  from  the  cost  cards  or  job  ledger. 

d.  The  manufacturing  expense  inventory  consists  of  all  manufacturing  expenses  yet  to  be 
charged  to  work  in  process.     When  manufacturing  expenses  are  distributed  on  a  percentage 
basis,  this  inventory  is  found  by  calculating  the  manufacturing  expenses  that  have  accrued 
on  the  uncompleted  work  in  process.     (Read  ^723 ;  then  read  H724) .     If  manufacturing  expenses 
are  distributed  through  machine,  productive  factor  or  productive  center  time,  the  inven- 
tory would  include  any  productive  hours  that  have  not  been  charged  on  the  cost  cards  or  in  the 
job  ledger,  and  any  idle  machine  hours  if  idle  time  has  not  been  included  in  the  supplementary 
rate.    A  separate  record  should  be  kept  of  idle  machine  hours,  which,  taken  in  connection  with 
the  results  shown  by  the  manufacturing  account,  would  give  a  complete  analysis  of  manufac- 
turing expenses  and  shop,  or  works,  efficiency. 

e.  Factory  expense  inventory  is  similar  to  the  ordinary  expense  inventory.     (H464-474c) 
These  inventories,  like  the  other  manufacturing  account  inventories  should  be  treated  as 
diracted  in  rule  172. 

/.  Finished  goods  inventory  is  in  every  way  similar  to  merchandise  inventory,  described 
in  1T169,  except  that  it  is  always  taken  at  cost  price,  whereas,  if  there  has  been  any  depreciation 
or  change  in  value,  it  should  be  disposed  of  as  instructed  in 


MANUFACTURING  STATEMENTS  239 

MANUFACTURING  STATEMENTS. 

755.  Four  principal  statements  are  usually  prepared  at  the  close  of  each 
fiscal  period  from  the  books  of  a  manufacturing  business:  the  manufacturing 
statement,  to  show  the  cost  of  production  of  goods  manufactured  during  the  year 
or  other  fiscal  period;  the  trading  statement,  to  show  the  gross  trading  profit  or 
the  gross  trading  loss  from  sales  for  the  period  (^[234);  the  profit  and  loss  state- 
ment, to  show  the  net  profit  or  the  net  loss  for  the  period  and  its  disposition  at 
the  close  of  the  period  (^[437);  and  the  statement  of  resources  and  liabilities,  or 
balance  sheet,  for  the  period  (^[487).    The  first  of  these  statements  is  peculiar 
to  the  manufacturing  business;  the  last  three  are  in  every  way  similar  to  those 
of  a  trading  business,  which  are  fully  explained  in  previous  chapters. 

756.  The  form  of  the  manufacturing  statement  is  determined,  to  some 
extent,  by  the  classification  of  the  accounts  in  the  general  ledger,  which  is  also 
true  of  the  results  shown  in  the  final  trial  balance  from  which  the  statement  is 
prepared.     When  the  department  method  of  accounts  is  followed,  the  final  trial 
balance  supplies  most  of  the  data  for  a  very  comprehensive  proof  statement  show- 
ing the  disposition  of  the  various  cost  elements  in  the  manufacturing  processes. 
When  the  cost  method  of  accounts  is  followed,  the  trial  balance  and  the  accom- 
panying statement  are  usually  much  briefer,  as  the  various  cost  elements  are  fully 
accounted  for,  proven  and  disposed  of  in  the  current  control  accounts,  although 
the  manufacturing  statement  may  be  made  as  complete  as  desired  by  going  to 
the  ledger  accounts  for  supplementary  information. 

756a.  The  difference  in  results  shown  in  the  trial  balances  of  two  groups  of 
manufacturing  accounts,  both  made  up  from  the  same  series  of  transactions,  one 
group  kept  by  the  department  method  and  the  other  group  by  the  cost  method,  is 
strikingly  illustrated  in  the  trial  balances  shown  in  illustrations  103  and  108, 
and  the  manufacturing  statements  made  up  from  each.  These  differences  are 
noted  in  the  explanations  showing  the  reconciliation  between  them. 

757.  To  show  cost  elements  and  their  disposition  in  detail,  manufacturing 
statements  should  be  prepared  in  two  parts,  the  first  part  to  show  the  prime  cost 
of  the  goods  manufactured  or  partly  manufactured  for  the  period,  the  second 
part  to  show  the  factory  cost,  or  cost  of  production,  of  the  goods  manufactured  for 
the  period,  corresponding  with  the  first  two  items  in  the  cost  formula,  11664. 
Part  1  is  made  up  from  those  accounts  which  show  cost  of  materials  and  of  direct 
labor,  and  of  any  other  items  that  enter  into  the  prime  cost  of  the  goods  manufac- 
tured or  partly  manufactured.     Part  2  is  made  up  from  those  accounts  which 
show  the  cost  of  the  manufacturing  expenses  (burden  and  overhead),  and  of  any 
other  items  which,  added  to  prime  cost,  3nter  into  the  total  cost  of  production 
of  the  goods  manufactured. 


240 


BOOKKEEPING  AND  ACCOUNTANCY 


FORMULA  FOR  MANUFACTURING  STATEMENT 

PART  1,  showing  prime  cost. 


758.'    Elements  of  cost  for  period  consist  of: 

a.  Cost  of  materials  on  hand  at  the  begin- 
ning of  period,  as  shown  by  inventory 
or  by   balance   of   materials   account. 
(1  707) 

b.  Cost  of  partly  manufactured  goods  on 
hand  at  the  beginning  of  period,  includ- 
ing cost  of  materials  and  direct  labor 
(prime  cost),  as  shown  by  inventories; 
or,  when  the  cost  method  of  accounts  is 
followed,  by  balances  of  "materials  in 
process"   and  "productive  labor"   ac- 
counts for  the  previous  period.     (If  713, 
718) 

c.  Cost  of  purchases  for  the  period,  less 
returns  and  allowances,   as  shown  by 
the  material  accounts  when  kept  under 
either  the  department  or  cost  method. 
(H705o) 

d.  Cost  of  productive  labor  (direct  labor) 
for  the  period,  as  shown  by  the  labor 
account.     (H  716a) 


759.     Disposition  of  costs  shown  in: 

e.  Cost  of  goods  manufactured  during 
period,  including  cost  of  material  and 
direct  labor  (prime  cost),  as  shown  by 
the  material  and  labor  accounts;  or, 
when  the  cost  method  of  accounts  is 
followed,  as  shown  by  credits  to  the 
"materials  in  process"  (1f  712c)  and 
"productive  labor"  (f  7176)  accounts, 
the  contra  of  which  is  charged  to  fin 
ished  goods  account. 

/.  Cost  of  partly  manufactured  goods  oi» 
hand  at  the  close  of  the  period,  valued  at 
prime  cost,  as  shown  by  unfinished 
orders,  jobs  or  contracts;  or,  when  the 
cost  method  of  accounts  is  followed,  by 
the  sum  of  the  balances  of  "materials 
in  process"  (If  713)  and  ''productive 
labor"  accounts  (prime  cost).  (If  718) 

g.  Cost  of  materials  on  hand  at  the  close 
of  the  period,  shown  by  the  inventory; 
or,  when  the  cost  method  oi  accounts 
is  followed,  by  the  balance  of  the  mate- 
rials account.  (If  707) 


PART  2,  showing  cost  of  production. 


760.     Elements  of  cost  consist  of: 

A.  Cost  of  manufacturing  expenses  at 
beginning  of  period,  as  shown  by  inven- 
tory; or,  when  the  cost  method  of  ac- 
counts is  followed,  by  the  balance  of 
manufacturing  expense  account  at  the 
beginning  of  period.  (f723) 

i.  Cost  of  goods  manufactured  during 
the  period,  as  described  in  item  "e  ' 
above  (prune  cost). 

j.  Cost  of  manufacturing  expenses  for 
the  period,  as  shown  by  the  manufac- 
turing expense  account  or  accounts 
for  the  period,  (f  721a,  6) 


761.     Disposition  of  costs  shown  in: 

k.  Cost  of  manufacturing  expenses  on 
partly  manufactured  goods,  at  the  close 
of  the  period,  as  shown  by  the  balance 
of  manufacturing  expense  account  or 
accounts.  (If  723) 

I.  Cost  of  goods  manufactured  during  the 
period,  at  total  cost  of  production,  az 
shown  by  finished  cost  sheets  or  orders; 
or,  when  the  cost  method  of  accounts 
is  followed,  by  the  amount  charged 
to  finished  goods  account  for  the  period. 
(H  741o) 


MANUFACTURING   STATEMENTS 


762.  The  elements  of  cost  included  in  a  complete  manufacturing  statement 
for  a  given  period  may  be  clearly  understood  from  the  formula  opposite,  in  which 
the  items  are  shown  in  the  position  and  order  in  which  they  should  appear  in 
the  statement.     It  will  be  observed  that  a  statement  prepared  after  this  formula 
will  show  not  only  the  various  elements  of  cost  entering  into  the  total  cost  of 
production,  but  also  a  proof  of  the  correct  distribution  of  these  costs  by  account- 
ing for  them  in  the  completed  and  partly  manufactured  goods  for  the  period,  and 
in  the  proven  balances  shown  by  the  control  accounts. 

763.  A  final  trial  balance,  taken  from  a  set  of  books  in  which  the  manu- 
facturing accounts  are  kept  by  the  department  method  (1f687),  is  shown  in  illus- 
tration  103.     The  manufacturing  accounts  are  indicated  by  the  letter  "M" 
in  the  margin. 


ILLUSTRATION  103 


TRIAL  BALANCE,  EECBMBER  31,   19 


TOED  IIPG.   CO. 


Cash  -  par  C.  B. 

10200 

00 

Cash  -  petty 

200 

00 

II 

Materials  and  supplies   j 

3800 

00 

If 

Material  in  process 

2700 

00 

M 

Labor  in  process       s  Inventories,  Jan.  1,  19 

1400 

00 

• 

Manufacturing  expenses 

650 

00 

Finished  goods 

7000 

00 

Accounts  Receivable 

17500 

00 

Machinery 

29000 

00 

Small  Tools 

1800 

00 

Office  furniture  and  fixtures 

500 

00 

Store  Fixtures 

500 

00 

Accrued  Taxes 

100 

00 

Accrued  Pay-roll 

1200 

00 

Accounts  Payable 

6000 

00 

Surplus 

8200 

00 

Reserve  for  Uncollectable  Accounts 

350 

00 

Reserve  for  Depreciation  on  Machinery,  etc. 

1500 

00 

Capital  Stock  -  Preferred   250  shares  at  $100 

25000 

00 

Capital  Stock  -  Concon     250     "      " 

25000 

00 

11 

Materials  Purchased 

53000 

00 

M 

Labor 

34000 

00 

Sales,  less  returns,  allowances  &  discounts 

116200 

00 

• 

Manufacturing  Expenses 

12000 

00 

Selling  Expenses 

5000 

00 

Administrative  Expenses 

4100 

00 

=^  — 

183550 

00 

183550 

00 

764.  Inventories.  The  inventories  at  the  close  of  the  period,  December  31, 
are  as  follows:  materials  and  supplies,  $8500;  materials  in  process,  $4200; 
labor  in  process,  $1750;  manufacturing  expenses,  $1480;  finished  goods,  $9420. 


242 

llXUBTRATIOK   104 


BOOKKEEPING  AND  ACCOUNTANCY 

STATEMBKT  FOR  TEAR  HITDIKG  PECSMBER  31,  19 


Prime  Coat. 


7*7* 


7*7 


INVENTORIES,   Jan.    1,   19      , 

Materials  and  supplies  at  cost 

f     Materials  in  process  -  partly  mfg'd  goods 

t     Labor  in  process          -  " 

PURCHASES  OF  UATCRIALS  and  other  manufacturing  supplies 
during  period,  including  inward  freight  and  express- 
age,  less  returns,  allowances,  discounts,  etc. 

PRODUCTIVE  LABOR  for  period 


Production  Coat. 


^CANUFACTURING  EXPENSES  of  preceding  period  applicable 
to  partly  manufactured  goods 

PRIME  COST  of  goods  manufactured  during  period,  brought  dotyn 

MANUFACTURING  EXPENSES  during  period:   - 

Rent  of  factory  2200 

Taxes  of  factory  200 

Stationery  and  supplies  100 

Insurance  on  materials  and  machinery  500 

Superintendence  1500 

Wages  of  foreman  and  factory  clerks  2400 

Wages  of  firemen,  engineers  and  oilers  2500 

Fuel  and  lighting  500 

Repairs  and  renewals  on  machinery  600 

Depreciation  on  machinery  1500 


2700 
1400 


3600 
4100 


53000 
34000 


94900 


650 
60450 


12000 


93300 


765.  Manufacturing  statement — department  method  of   accounts.     The 

statement  in  illustration  104  is  made  up  from  the  trial  balance,  illustration  103, 
and  the  inventories  at  the  close  of  the  period.  The  American,  or  standard  form 
of  statement  is  shown  in  the  illustration.  The  items  in  detail,  entering  into  the 
total  manufacturing  expenses  as  shown  on  the  statement,  were  found  by  an  analy- 
sis of  the  manufacturing  expense  account.  The  same  is  true  of  the  items  making 
up  the  total  selling  expenses  and  the  total  administrative  expenses  shown  in 
illustrations  105  and  106. 

766.  Preparation  of   the  manufacturing  statement  when  manufacturing 
accounts  are  kept  by  the  department  method.    Explanation:    Notice  that  Part 
1  of  the  statement  shows  prime  cosf,  and  that  Part  2  shows  cos£  of  production, 
in  agreement  with  the  formula  for  manufacturing  statement.     (1f664) 

Part  1. 

(1)  Inventories,  January  1,  19    ,  consisting  of  three  items,  are,  inventories 
at  the  close  of  the  last  preceding  fiscal  period,  taken  from  the  trial  balance.     (If  174) 

(2)  Purchases  of  materials  are  shown  by  the  debit  balance  of  materials 
account  in  the  trial  balance. 

(3)  Productive  labor  is  shown  by  the  debit  balance  of  the  labor  account  in 
the  trial  balance. 


MANUFACTURING  STATEMENTS 

THS  TOED  MAKUFACTURIHG  CO.,  PITTSBUBS,  PA. 


248 


PRIME  COST  (materials  and  labor)  of  goods  manufactured 

during  parted,  carried  down    ^  / 
ISVEHTORIES,  Doo.   31,  19     , 

Materials  and  supplies,  at  cost 

Materials  In  process  -  partly  rafg'd  goods 

Labor  in  process          - 


MABDFACTOTITO  EBOTSES  applicable  to  partly  manufactured 

goods 
PEODOCTIOH  COST  of  goods  manufactured  during  period,  carri 

to  trading  stateaent 


4200 
1750 


80450 
6500 
5950 


94900 


1480 
91820 


93300 


(4)  Prime  cos£  is  the  difference  between  the  debit  items  showing  cost  of 
material  and  productive  labor,  and  the  credit  items  showing  the  inventories 
at  the  close  of  the  period,  i.e.,  it  represents  the  cost  of  the  material  and  labor 
entering  into  the  goods  manufactured  during  the  period. 

(5)  Inventories,  December  81, 19    ,  consisting  of  three  items,  are  the  inven- 
tories at  the  close  of  the  present  fiscal  period.     (H174)     After  this  item  is  entered, 
Part  1  of  the  statement  should  be  footed  and  ruled,  as  shown  in  the  illustration. 

Part  2. 

(6)  Manufacturing  expenses  during  preceding  period,  the  first  item  on  the 
debit  side  of  Part  2,  is  the  inventory  of  manufacturing  expense  account  at  the 
close  of  the  last  preceding  fiscal  period,  as  shown  in  the  trial  balance. 

(7)  Prime  cost  is  the  first  item  on  the  credit  side  of  Part  1  brought  down. 

(8)  Manufacturing  expenses  for  the  period  are  found  in  the  debit  balance 
of  manufacturing  expense  account  in  the  trial  balance,  the  various  items  being 
found  by  an  analysis  of  that  account. 

(9)  Manufacturing  expenses,  the  first  item  on  the  credit  side,  is  the  amount 
of  the  inventory  of  these  expenses  at  the  close  of  the  present  fiscal  period. 

(10)  The  production  cost  of  the  goods  manufactured  during  the  period  is 
the  difference  between  the  sum  of  the  debit  and  the  credit  items,  which  completes 
Part  2  of  the  statement.  The  production  cost,  represented  in  the  last  credit 
item,  is  the  connecting  link  between  the  manufacturing  and  the  trading  statement, 
that  item  being  shown  as  the  second  item  on  the  debit  side  of  the  trad  ing  state- 
ment. 


244 

ILLUSTRATION  105 


BOOKKEEPING  AND   ACCOUNTANCY 

TRADING  STATEMENT  FOR  YEAR  ENDING  DECEUHSR  31,  19 


INVENTORY,   Deo.   31,   19     , 

Manufactured  goods  on  hand  at  close  of 

preceding:  period 
GOODS  MANUFACTURED  during  period,  per  manufacturing 

statement 
Total  cost  of  manufactured  product 
Leas  INVENTORY  manufactured  goods  on  hand,  at  close 

of  this  period,  Dec.  31,  19     , 
Cost  of  goods  sold 
Gross  trading  profit  carried  down 


SELLING  AND  DISTRIBUTING  EXPENSES, 

Freight  outward 

Cocsnission  for  selling 

Salesmen's  salaries 

Wages  of  shippers  and  packers 

Insurance  on  stock,  eta. 

Traveling  expenses 

Supplies 

Advertising 

Heat  and  light 

Rent  show-room 

Storage,  -  outside  warehouse 

Depreciation  on  fixtures 
NET  TRADING  PROFIT  carried  to  profit  and  loss  statement 


100 

20C 

2500 

600 

50 
1230 

50 
100 

1C 
100 

50 

10 


7000 
91820 


98820 
9420 


89400 
26800 


116200 


5000 


767.  Trading  statement.  This  statement  is  similar  in  all  essential  partic- 
ulars to  the  trading  statement  of  a  mercantile  business.  (1(240)  It  is  shown 
in  illustration  105.  The  statement  of  resources  and  liabilities  is  shown  in  illus- 
tration 107. 


ILLUSTRATION  106 


PROFIT  AND  LOSS  STATEMENT  FOR  YfiAR  ENDING  DECEMBER  31,   19 


ADMINISTRATIVE  EXPENSES 

Rent  of  offices 

100 

Insurance  on  furniture  &  fixtures 

18 

Taxes  -  proportion 

50 

Interest  on  loans 

30 

Officers'  salaries 

2000 

Clerks'  salaries 

1000 

Audit  fee 

200 

Stationery  and  office  supplies 

50 

Heat  and  light 

100 

Repairs,  office  furniture 

60 

Reserve  for  doubtful  accounts 

400 

Depreciation  on  furniture 

92 

4100 

NET  PROFIT  for  period,  carried  down 

17700 

21800 

DIVIDEND  Preferred  stock,  $25000,  at  758 

1750 

Comoon  stock,  $25000,  at  10$ 

2500 

4250 

SURPLUS  PROFITS  carried  down 

13450 

17750 

Surplus,  Dec.  31,  19  ,  as  shown  on  balance  sheet 

21650 

21650 

MANUFACTURING  STATEMENTS 

THE  TOKD  MAMTFACTURIHG  CO.,  PITTSEURG,   PA. 


245 


Sales  -  less  returns,  allowances  and  discounts 


Gross  trading  profit  bro't  down 


11620C 


116200 


26800 


2680C 


768.  Profit  and  loss  statement.  This  statement,  shown  in  illustration 
106,  while  similar  to  the  profit  and  loss  statement  explained  in  ^[435-445  is 
divided  into  three  parts,  the  first  showing  the  net  profit  for  the  period,  the  second 
showing  the  distribution  of  the  net  profits  for  the  period,  and  the  third  showing 
the  undivided  profits,  or  surplus,  of  the  business  at  the  close  of  the  period. 

THE  TOED  UABUFACTURIHO  CO. ,  PITTSBURG,  PA. 


RET  TRADING  PROFIT  from  trading  statement 


BET  PROFIT  bro't  doira 


SURPLUS  PROFIT,   surplus  a/o,  Jan.    1,   19 
SURPLUS  profit  for  period,  bro't 


21600 


21BOO 


17700 


8200 
13450 
216gp 


246 

ILLUSTRATION  107 


BOOKKEEPING   AND  ACCOUNTANCY 

ST4.TECSJT  OP  RESOURCES  AHD  LIABILITIES,  DECEMBER  31,  19 


Cash  in  office 
Cash  in  bank 
Inventories,  - 

Materials  in  stock 

llaterials  in  process 

Labor  on  materials  in  process 

Manufacturing  expenses 

Finished  goods  in  stock 
Accounts  receivable 

Less  reserve  for  uncollectable  accounts 
Total  current  resources  (assets) 
Machinery 

Less  reserve  for  depreciation 
Small  tools 

Office  furniture  and  fixtures 
Store  fixtures 
Total  resources 


200 

10200 


9500 
4200 
1750 
1460 
9420 


17500 
350 


29000 
1500 


500 
500 


10400 


25350 
17150 


52900 


27500 
1800 


_1000 


63200 


ILLUSTRATION  108 


FTSAL  TRIAL  BALAHCE,  DECEMBER  31,  19  .   THE  TODD  HFO.  CO: 


Cash  -  per  C.  B. 

10200 

Cash  -  petty 

200 

Materials 

8500 

Materials  in  Process 

4200 

Productive  Labor 

1750 

Manufacturing  Expense 

1480 

Finished  Goods 

9420 

Accounts  Receivable 

17500 

Machinery 

290  OC 

Small  Tools 

1800 

Office  Furniture  4  Fixtures 

500 

Store  Fixtures 

500 

Accrued  Taxes 

100 

Accrued  Pay-roll 

1200 

Accounts  Payable 

6000 

Surplus 

6200 

Reserve  for  Uncollectable  Accounts 

(contra  in  admr.  ex.  a/c) 

350 

Reserve  for  Depreciation  on  Machinery,  etc. 

(contra  in  Hfg.  Exp.  &  Factory  Exp.  ) 

1500 

Capital  Stock    Preferred  -  250  shares  at  $100 

25000 

Capital  Stock      Common  -  250    "    "  100 

2500C 

Cost  of  Sales 

8940C 

Sales 

116200 

Selling  Expense 

5000 

Administrative  Expense 

410C 

•—  - 

183550 

18355C 

769.  The  final  trial  balance,  taken  from  a  set  of  books  in  which  the  manu- 
facturing accounts  are  kept  by  the  cost  method  (^[689),  is  shown  in  illustration 
108.  The  amounts  were  made  up  from  exactly  the  same  transactions  that 
entered  into  the  accounts  shown  in  the  trial  balance  in  illustration  103.  It  will 
be  noted  that  the  trial  balance  under  the  cost  method  is  considerably  shorter,  and 
that  the  balances  shown  by  the  manufacturing  accounts  differ  from  those 


MANUFACTURING  STATEMENTS 


THE  TODD  lIAflUFACTOKING  CO.,  PITTSBOTG,  PA. 


247 


Aocrued  taxes,  -  estimated 
Accrued  labor 
Accounts  payable 
Total  current  liabilities 
Dividends  declared 
Preferred  stock,  $25000,  at  1% 
Connon     "     25000,  "  lo£ 
Total  liabilities 
Capital  stock  issued 
Preferred 
Connon 
General  Profit  and  Loss  account 
Surplus,  Jan.  1,  19  , 
D»0.  31,  19  . 

1750 
2500 

10< 
1200 
600C 

730C 
425C 

25000 
25000 

1155C 
50000 
21650 

6200 
13450 

6320C 

'   •      —  — 

'        — 

shown  in  the  trial  balance  under  the  department  method.  When  both  methods 
are  thoroughly  understood,  however,  it  is  not  difficult  to  reconcile  the  manufac- 
turing accounts  of  one  trial  balance  with  those  of  the  other,  as  is  explained  in 
TI771.  It  should  also  be  noted  that  while  the  balances  of  the  materials,  materials 
in  process,  productive  labor,  manufacturing  expense,  and  finished  goods 
accounts  in  illustration  108  show  the  inventory  value  of  those  accounts  at  the 
close  of  the  present  fiscal  period,  the  balances  shown  by  similar  accounts  in 
illustration  103,  under  the  department  method  of  accounts,  show  the  inventory 
values  at  ths  close  of  the  last  preceding  fiscal  period. 

770.  An  interesting  exhibit  of  the  manufacturing  accounts  under  the  cost 
method  may  be  had  by  opening  each  account  with  the  inventories  shown  in  the 
trial  balance,  illustration  103,  and  posting  the  journal  entries,  shown  in  illustration 
109,  which  represent  in  totals  the  entries  made  during  the  year  in  the  various  cost 
journals.  It  will  be  seen  that  the  balances  shown  by  these  accounts  at  the  close 
of  the  period  agree  with  the  balances  shown  in  trial  balance,  illustration  108. 


ANALYSIS  SHOWING  AGREEMENT  OP  MANUFACTURING  ACCOUNTS  IN  TRIAL 
BALANCE,  ILLUSTRATION  108,  WITH  SIMILAR  ACCOUNTS  IN  TRIAL  BALANCE, 
ILLUSTRATION  103. 

771 .  This  analysis  explains  the  essential  differences  between  the  cost  and 
the  department  methods  of  accounts.  It  shows  also  that  while  the  results  are 
different  in  each  corresponding  account,  they  are,  in  fact,  harmonious,  each  being 
correct  under  the  method  employed  for  keeping  it. 


248 


BOOKKEEPING  AND  ACCOUNTANCY 


IU.CSTRATION  109 

SERIES  OP  EHTR1E3  SHOtflffO  AGGREGATE  AUOOTTS  DEBITED  AHD  CREDITED 
7k,.  KAHUFACTTOITO  ACCOUNTS  FOR  THS  YEAR,   PER  THE  COST  METHOD. 


TO 


747 

Materials               Purchases 

53000 

Aocou.it  B  Payable 

53000 

746 

Materials  In  Process       Requisitions 

50600 

Materials 

50600 

749 

Materials               Returned  to  stores 

2300 

Materials  in  Process 

2300 

ProductiYe  Labor         Pay-roll  from  cash  book 

34000 

Cash 

34000 

. 

Manufacturing  Expenses     Estimate  for  year,  per 

12000 

Factory  Expenses      general  journal 

12000 

-750 

Finished  Goods 

91820 

Materials  in  Process 

46800 

Productive  Labor 

33650 

Manufacturing  Expense 

11370 

751 

Cost  of  Sales            General  Journal 

89400 

Finished  Goods 

89400 

ILLUSTRATION   110 


(a)  Materials  account.  This  account,  illustration  110,  is  debited,  first, 
with  the  balance  brought  down  from  the  last  preceding  fiscal  period,  December 
31,  $3800.  This  amount  corresponds  with  the  amount  shown  as  the  inventory 
of  materials  and  supplies  in  trial  balance,  illustration  103.  The  materials 
account  is  then  charged  with  the  materials  purchased  for  the  period,  $53000 
(5f705a),  and  with  the  materials  returned  from  work  in  process,  $2300.  (^[705&) 
It  is  credited  with  the  amount  of  material  requisitioned  for  work  in  process 
during  the  period,  $50600  (^]706c),  the  balance  of  the  account,  $8500,  being  the 
amount  shown  on  trial  balance,  illustration  302  (^[707) 


MANUFACTURING   STATEMENTS 


248 


ILLUSTRATION  111 


•a/ 


vfTPt 


GO 


7? 


tt-20t, 


(6)  Materials  in  process  account.  The  balanoe  in  this  account,  $2700, 
illustration  111,  agrees  with  the  item  for  that  account  in  trial  balance,  illustration 
103.  It  is  then  charged  with  all  goods  requisitioned  from  the  materials  account 
for  the  period.  (If 71  la)  The  account  is  credited  for  any  materials  returned 
to  the  store-room  and  charged  back  to  the  materials  account  (7126),  and  for  the 
amount  of  material  used  in  finished  orders,  jobs  or  contracts,  at  cost.  (712c) 
The  balance  of  the  account  shows  the  cost  of  the  material  in  the  uncompleted 
work  in  process,  $4200,  being  the  amount  shown  on  trial  balance,  illustration  108. 
(11713) 

ILLUSTRATION  113 


/f/-co 


-VvjUwvJLffv^ 


ff 


(c)  Productive  labor.  The  balance  brought  down  in  this  account  is  $1400, 
agreeing  with  the  inventory  of  labor  in  process  in  trial  balance,  illustration  103. 
The  account  is  then  charged  with  direct  labor  for  the  period  (^[716a),  and  is 
credited  with  the  direct  labor  expended  in  goods  manufactured  for  the  period 
(H7176),  the  balance  of  the  account,  $1750,  agreeing  with  trial  balance,  illus- 
tration 108.  (H718) 

ILLUSTRATION   113 


f 


\\ 


250 


BOOKKEEPING  AND  ACCOUNTANCY 


(d)  Manufacturing  expense.  On  trial  balance,  illustration  103,  $850  is 
shown  as  the  amount  of  the  inventory  for  this  account,  brought  down  from  the 
previous  period,  which  agrees  with  illustration  113.  It  is  then  charged  with 
the  estimated  manufacturing  expenses,  $12000.  (H721a,  6)  It  is  credited  for 
thi  expenses  distributed  in  the  goods  manufactured  (^[722c),  the  balance,  $1480, 
agreeing  with  the  item  in  trial  balance,  illustration  108.  (H723) 

ILLUSTRATION  114 


/•M 


<7ZS-2.fi 


(e)  Finished  goods  account  shows  a  balance  brought  down  of  $7000, 
corresponding  with  the  inventory  in  trial  balance,  illustration  103.  It  is  charged 
with  $91820,  the  cost  of  the  goods  manufactured  during  the  period.  (^[741a) 
It  is  credited  for  the -cost  of  the  goods  sold  during  the  period,  $89400  (^7426), 
the  balance  of  the  account,  $9420,  agreeing  with  trial  balance,  illustration  108. 
(11743) 

772.  A  careful  study  of  these  ledger  accounts  and  the  references  given, 
will  show  that  all  the  elements  of  cost  included  in  the  manufacturing  statement, 
made  up  from  the  manufacturing  accounts  kept  by  the  department  method, 
illustration  103,  have  been  included,  proven  and  disposed  of  in  the  manufacturing 
accounts  kept  by  the  cost  method,  the  final  results  being  shown  in  the  balances 
of  the  accounts  and  in  the  debit  of  $91820  to  finished  goods  account,  the  connect- 
ing item  between  the  group  of  manufacturing  accounts  and  the  group  of  selling 
accounts  being  the  cost  of  the  goods  sold,  $89400,  which  is  the  total"  credit  to 
finished  goods  account  for  the  period. 

773.  Manufacturing   statement — cost  method  of   accounts.     When  the 
manufacturing  accounts  are  kept  by  the  cost  method,  the  manufacturing  state- 
ment shown  in  illustration  104  may  be  prepared,  but  the  accounts  in  the  ledger 
must  be  referred  to  for  part  of  the  information  necessary,  as  follows: 

Parti. 

• 

(1)  Inventories,  January  1,  19  ,  instead  of  being  taken  from  the  trial 
balance,  illustration  103,  are  found  in  the  inventory  balances  of  the  materials, 
materials  in  process,  and  productive  labor  accounts,  brought  down  from  the 
preceding  fiscal  period,  January  1,  as  shown  in  the  accounts  in  illustrations 
110-114. 


MANUFACTURING   STATEMENTS  251 

(2)  Purchases  of  materials,  $53000,  is  the  sum  of   the  purchases  for  the 
period  shown  on  the  debit  side  of  the  materials  account,  exclusive  of  the  items 
for  materials  returned  from  work  in  process  and  the  balance  of  the  account  at 
the  beginning  of  the  period.     See  illustration  110. 

(3)  Productive  labor.  $34000,  is  shown  by  the  debit  footing  of  productive 
labor  account,  exclusive  of  the  inventory  at  the  beginning  of  the  period. 

(4)  Prime  cost  of  goods  manufactured,  $80450,   is   the  sum  of  the  credit 
footing  of  materials  in  process  account  less  items  of  materials  returned  to  stock- 
room, $46800,  and  the  credit  footing  of  productive  labor  account,  $33650. 

(5)  Inventories,  December  81, 19    ,  are  shown  by  the  balances  of  the  materi- 
als, materials  in  process,  and  productive  labor  accounts,  as  shown  in  the  trial 
balance,  illustration  108.     These  balances  equal  the  inventory  value,  at  cost 
price  of  the  materials  in  stock,  materials  in  process  of  manufacture,  and  produc- 
tive labor  charged  to  work  in  process,     (If  707,  713,  718) 

This  completes  Part  1  of  the  manufacturing  statement,  under  the  cost  method, 
and  the  footings  of  the  two  sides  of  the  statement  must  be  equal,  i.e.,  all  of  the 
costs  charged  on  the  debit  side  of  the  statement  are  accounted  for  on  the  credit 
side  of  the  statement,  the  balarces  being  supported  by  inventories,  which  are 
again  proven  by  the  various  subordinate  factory  books  and  journals,  such  as 
the  materials  ledger,  etc. 

Part  2 

(6)  Manufacturing  expenses  during  preceding  period,  the  first  item  on  the 
debit  side  of  Part  2,  is  the  balance  of  the  manufacturing  expense  account  brought 
down  from  the  preceding  fiscal  period,  as  shown  in  that  account  in  illustration  113. 

(7)  Prime  cost  of  goods  manufactured  during  the  period  is  the  amount 
shown  in  item  1  on  the  credit  side  of  Part  1  of  the  statement,  brought  down. 
(See  1f  773  (5)  ). 

(8)  Manufacturing  expenses  for  the  period  are  shown  by  the  debit  footing 
of  manufacturing  expense  account,  exclusive  of  the  inventory  of  the  preceding 
period,  brought  down  January  1. 

(9)  Manufacturing  expenses,  the  first  item  on  the  credit  side  of  Part  2,  is 
the  inventory  value  of  these  expenses  at  the  close  of  the  present  fiscal  period, 
shown  by  the  balance  of  manufacturing  expense  account.     (If  723) 

(10)  The  production  cost  of  goods  manufactured  during  the  period  $91820 
is  the  debit  footing  of  finished  goods  account,  exclusive  of  the  balance  of  the 
account  for  the  preceding  fiscal  period,  brought  down  January  1.      It  is  the 
amount  charged  to  finished  goods  account  during  the  period  from  the  finished 
goods  journal  and  equals  the  sum  of  the  credits  to  materials  in  process  ($46800), 
productive  labor  ($33650),  and  manufacturing  expenses  ($11370).  (1f7l2c,  7176, 
722c) 


262 


BOOKKEEPING   AND    ACCOUNTANCY 


774.  Manufacturing  accounts,  under  the  cost  method,  are  self-proving.  On 
the  debit  side  they  show  the  costs  of  material,  labor  and  manufacturing  expenses; 
on  the  credit  side  they  show  the  disposition  of  these  costs  through  the  various 
manufacturing  processes  until  the  final  result,  shown  in  the  total  cost  of  produc- 
tion, is  reached,  for  which  finished  goods  account  is  debited.  (U741a)  The 
balance  shown  by  each  account  is  also  self-proving,  as  it  must  agree  with  the 
inventories  and  the  results  shown  by  the  various  supplementary  cost  books  and 
records,  such  as  the  materials  and  stock  ledgers,  cost  cards,  sheets,  and  summa- 
ries. For  this  reason,  the  manufacturing  statement  is  frequently  omitted,  the 
"cost  of  merchandise  sold"  being  the  connecting  item  between  the  manufactur- 
ing and  the  trading  accounts,  as  shown  in  illustration  114.  .  It  will  be  noticed 
that  the  trading  and  profit  and  loss  statement,  illustration  115,  is  in  report  form. 
It  may  be  prepared  in  the  standard  form,  as  shown  in  illustrations  105,  106. 


ILLUSTRATION  115 


TRADING  AND  PROFIT  &  LOSS  STATEMENT,  DECEMBER  31,  19 


Gross  Sales 

Leas  returns,  allowances  &  discounts 
Net  Sales 

Less  cost  of  merchandise  sold 
Gross  trading  profit  for  period 
Less  Selling  expenses,  viz., 

Freight  outward 

Corarnlssions 

Salesmen's  salaries 

Wages  shippers  and  packers 

Insurance  on  stock 

Traveling  expenses 

Supplies 

Advertising 

Gas,  fuel  and  light 

Rent 

Storage  (outside  warehouse) 

Depreciation  on  Fixtures 
Net  Trading  profit  for  period 
Administrative  expenses,  - 

Rent  (proportion) 

Insurance  on  fixtures 

Taxes  (proportion) 

Int.  on  temp,  loan 

Officers'  salaries 

Salaries  of  office  clerks 

Audit  fee 

Stationery  &  office  supplies 

Gas,  fuel  and  lighting  (proportion) 

Repairs  -  office  fixtures 

Unoollectable  accounts  (Charge  for  contra  to  reserve) 

Depreciation  on  fixtures 
Set  profit  for  period 
Dividend  declared,  - 

Preferred  stock,  $25000,  at  1% 

Coianon     "     25000,  "  10% 
•Balance  to  Surplus  a/o 


116500 
300 


100 

200 

2500 

600 

50 
1230 

50 
100 

10 
100 

50 

10 


100 
18 
50 
30 

2000 
1000 

200 
50 

100 
60 

400 
92 


1750 
2500 


116200 
89400 


26800 


5000 


21800 


4100 


17700 


4250 


13450 


MANUFACTURING   STATEMENTS 


253 


775.  A  statement  of  manufacturing  operations  may  be  prepared  to  accom- 
pany the  preceding  trading  and  profit  and  loss  statement,  if  desired.  By  refer- 
ring to  the  ledger  accounts,  illustrations  110-114,  it  will  be  seen  that  this  state- 
ment is  nothing  more  than  a  statement  in  report  form  of  the  facts  shown  by 
those  accounts. 


ILLUSTRATION  116 


STATEMEHT  07  MAEOTACTPRIIC  OPERATIONS  MR  TEAR  EKDIHG  IBCEHBER  31,  19_ 
THE  TODD  MFG.  CO. .   PITTSBOBG.   PA. 


MATERIALS  A/C 

Inventory  and  supplies,  Jan.  1,  19  . 

Purchases  during  period 

Ilateri&lB  requisitioned  for  work  in  process 
Leas  materials  returned  to  stock 

Cost  of  materials  transferred  to  work  in 

process,  during  period 
Balance  a/c  -  Materials  on  hand,  per  inventory 

MATERIALS  IH  PROCESS  A/C 

Inventory  materials  in  process  partly  manu- 
factured, Jan.  1,  19  , 

Materials  requisitioned  during  period,  less 
returns 

Less  Cost  of  materials  in  the  completed  product 
of  the  period 

Balance  a/c  -  Bateriais  in  process  at  close  of 
the  period 

PRODUCTIVE  LABOR  A/C 

Inventory  of  labor  on  materials-  in  proces», 

partly  manufactured  Jan.  1,  19  , 

Labor  on  completed  and  partly  manufactured 

goods  for  the  period 
Less  Labor  expended  on  completed  goods 
Balance  a/c  -  Labor  on  uncompleted  work  in 

process,  at  close  of  period 

IIAHUPACTURIBG  2XPEHSE  A/C 

Inventory  of  expenses  on  goods  in  process, 

partly  manufactured  Jan.  1,  19  , 

Manufacturing  expenses  for  period 
Less  Mfg.  expenses  charged  to  completed  goods 
Balance  a/o  -  Expenses  on  uncompleted  work  la 

process,  at  close  of  period 

PIIISHED  GOODS  A/C 

Inventory,  Jan.  1,  19  , 

Cost  of  goods  manufactured  during  period 

'Materials     46800 
,  Labor        33650 
Itfg.  Expenses  11370 
Less  -  Cost  of  goods  sold  during  the  period, 

carried  to  trading  statement 
Balance  -  Inventory  on  hand  Deo-  31,  19  , 


3800 
55000 


50600 
2300 


2700 
48300 


1400 
34000 


850 
12000 


7000 
91820 


56800 


48300 


8500 


51000 
46800 


_4200 


35400 
35650 


1750 


12850 
11370 


98820 


89400 


9420 


254  BOOKKEEPING  AND  ACCOUNTANCY 

FORMS  OF  COST  RECORDS,  REPORTS,  BOOKS,  ACCOUNTS,  STATEMENTS,  Ere. 

776  .  These  forms  may  be  designed  in  great  variety,  and  for  many  purposes. 
Those  shown  in  the  following  illustrations  are  general  in  character,  and  are 
\ntended  to  offer  suggestions  for  forms  that  could  be  used  for  the  purposes  named, 
lather  than  to  be  considered  as  exact  models,  since  they  would  likely  have  to  be 
changed  considerably,  in  size  and  descriptive  matter,  to  meet  the  requirements  of 
a  particular  cost  system.  The  various  journals  receiving  entries  from  these  forms 
are  frequently  ruled  to  correspond.  Such  of  the  forms  -as  can  be  conveniently 
printed  and  made  out  in  copying  ink,  may  be  copied  in  the  appropriate  journals 
made  up  of  copy  paper,  from  which  abstracts,  or  recapitulations,  may  be  made 
up  at  the  close  of  each  month. 


117 


ORDER 

Date 19_ .       Ho . 

Make  to  r ; Addres  B 

Date  Wanted Date  Completed 


Here  follows  description  of  article,  with  instructions,  drawings,  etc. 


Material  Keg.  No. Routed  by. 


Pot  In  process Shop  order  Ho. 


Illustration  117.  This  is  a  suggestion  for  the  form  of  an  order,  issued  by  the  office  to  the 
superintendent  of  the  factory  or  works  for  the  making  of  a  certain  article  or  goods.  It  is  usu- 
ally accompanied  by  a  requisition  for  the  materials,  and  not  infrequently  by  drawings,  blue- 
prints, detailed  instructions  and,  where  works  are  thoroughly  organized,  by  a  routine,  or  pro- 
cess sheet,  indicating  exactly,  in  detail,  the  various  processes  to  be  followed  and  the  productive 
factors  to  be  employed,  from  the  time  the  order  is  received  in  the  works  until  the  finished  goods 
are  completed. 

Illustration  118.  This  is  a  suggestion  for  a  requisition  blank,  which  is  made  out  in  the 
office,  usually  in  triplicate,  one  copy  going  to  the  store,  or  stock-keeper,  another  following  the 
goods  to  the  work-shop,  the  third  being  retained  in  the  office,  where  it  is  entered  in  the  requisi- 
tion journal.  (V-  748) 


MANUFACTURING  STATEMENTS 


255 


ILLUSTRATION  118 


KEQUISITIOH  FOHH. 
Beq.   Ho.                                                                                                                          Date 

Storekeeper  -  Delivery  account  of 

Order 
Bomber 

Stock 

Number 

Quantity                         Particulars            Cost                  Amount 

~~  • 

—  ' 

_,_  _,^_    -N^—^m^'                  ~s_^,  

Delivered 

by                                                        Siened 

Beceived  above 

Ent'd  Mat.   Stock  Ledg 
Order  charged,  Cost  B 
Ent'd  Heq.   Journal,  p 

.  ,  pa/?e 

ec. 

aee 

ILLUSTRATION  119 


Return  Ko 

MATERIALS  RETUPJfED. 

Storekeeper  -  Credit  returned  material  account  of- 

Order 

1,'umber 

Stock 

Kumber 

Quantity 

Particulars 

Cost 

Amount 

^~^—  \  *- 

,  —  .  — 

^^-^~*~ 

—  v^~  —  i  —  • 

Store  keopt 
Returned  I 
Ent.   Raw  \ 
Order  crec 
Ent.  Tranz 

>r  receipt                                         Sinned 

>y 

lat.   Stock  Lc 
lited.  Coat  F 
>.    In.   Jour.  , 

d£.  .  paee 

lee. 

page 

Illustration  119,  This  is  a  suggestion  for  a  blank  which  is  made  out  when  materials  are 
returned  from  the  work-shop  to  the  stock-room.  It  is  entered  in  the  transfer  inward  journal. 
(H.  749)  The  items  and  the  amounts  in  this,  as  well  as  in  the  requisition  form,  shown  above, 
are  entered  in  the  stock  ledger. 

Illustration  120  shows  the  form  of  a  stock  card,  where  the  card  system  is  used,  or  the 
rulings  of  a  materials  ledger.  Not  infrequently  the  ordinary  form  of  ledger  is  used.  Macy 
prefer  the  loose-leaf  form  of  ledger  for  this  purpose. 


256 

ILLUSTRATION  120 


BOOKKEEPING  AND  ACCOUNTANCY 


STOCK  CAM) 
Raw  Material 


Article 


Classification  Ko. 

Maximum 

Minimum 

Location 


Eeeeived 


Delivered 


Balance 


Date  Sheet  Quantity  Price  Amount 
No. 


Date]  Sheet  Quantity  Price  Amount 
No. 


Date  Quantity  Price  Amount 


ILLUSTRATION  121 


DAILY  TIME  TICKET 
department 

Date 

ClOQ 

Kaco 

k  Ho. 

OefiirpatlnTi                                                                                                                                          Boom 

Order  Ko. 

Kind 

Operation 

Quantity 

Time 

Bate 

Amount 

Quantity  0.   Z.                                                 Price  0.  K.                                           Amount  0.  K. 

ILLUSTRATION  122 


Kaehine  Ho. 

MACHIKE  TIME  TICKET 
Operator 

Articl 
Time  b 
Total 
Chg'd 

9 

Bgun 

Finished 

hime 

H'rly  rate                                    Amt.  $ 

by 

Goat  sheet  Eo. 

Detail 

Date                           Ope 

ration                                        Remarks                                 No.  hrs. 

,  

.-—  >  -*  —  —  •  —  \^^^. 

Illustrations  121  and  122.  These  are  simple  forms,  which  explain  themselves.  The 
daily  time  ticket  shows  the  time  of  the  workman  for  the  day.  It  may  be  made  in  the 
form  of  a  weekly  tune  statement.  The  machine  time  ticket  is  used  to  record  the  daily  work 
performed  by  each  machine,  and  should  check  against  the  order  or  job  cards  following  each 
article  through  the  factory.  The  pay-roll  is  made  up  from  the  daily  time  tickets. 


THE   VOUCHER   SYSTEM 


257 


ILLUSTRATION  123 


Coat  of 

COST  SHEET 

For 

Address 

Order  Bo.                           Tfete   Issued                                          Completed 

Wiled 

Materials 

Productive  Labor 

Manufacturing  Expenses 

Date 

Reg. 
Ho. 

Quantity 

Amount 

Date  Ticket    Ho.  hr's     Bate  Amount 
Ho. 

Date 

Factor 
Ho. 

Time 

Rate 

Aajoxuzt 

r—  i 

LJI  i-i       i  -    •  T     i  :xa  i 

_ 

r 

SUHKAPT 


Cost 

Estimated 

Increase 

Decrease 

How  Accounted  For 

Haterlals 
Productive  Labor 
yfg.  Expenses 
Total  Fac.  Coat 
Selling  Ezp. 
Profit 
Selling  Price 

Correct 

Coat    fJIV. 

Examined 

Approved 
M«. 

Illustration  18$.  Cost  sheets  are  usually  kept  in  the  office,  but  a  cost  card,  ruled  like 
the  form  of  the  cost  sheet  shown  above  the  summary,  usually  follows  each  order,  j  ob  or  contract 
through  the  factory.  This  job  card,  as  it  is  usually  called,  is  sent  to  the  office  daily,  and  it  is 
from  this  card  that  the  cost  sheet  is  made  up.  When  bound  they  are  called  job  ledgers.  When 
the  work  is  completed,  the  summary  is  filled  out  and  proper  entries  are  made  in  the  finished 
goods  journal  (1(750),  which  completes  the  record  of  the  manufacturing  process.  The  illus- 
tration shows  only  one  of  many  different  forms  of  cost  sheets  and  of  job  cards,  which  vary  accord- 
ing to  the  requirements  of  the  shop  in  which  they  are  used.  Frequently  they  are  bound  in 
loose  leaf  ledger  form. 

It  should  be  noted  that  in  all  the  illustrations  of  forms,  no  attempt  has  been  made  to 
show  the  proper  width  of  columns  or  maintain  uniformity  in  the  spaces,  that  being  determined 
in  the  forms  by  the  size  of  the  headings. 


THE  VOUCHER  SYSTEM 

777.  This  is  a  name  given  to  a  method  of  recording  purchase  transac- 
tions, whereby  a  separate  account  with  each  person  from  whom  a  purchase  is 
made  becomes  unnecessary,  the  aggregate  total  of  such  accounts  being  carried  in 
an  accounts  payable,  or  vouchers  payable,  account,  which  in  every  particular  corre- 
sponds with  the  accounts  payable  account  described  in  ^[50,  illustration  9. 


258 

ILLUSTRATION  134 


BOOKKEEPING  AND  ACCOUNTANCY 


VOUCHER 


Dat* 

Vo.  Ho. 

Kaae 

Addrosa 

Materials 
Dr. 

Product  1  TO 
Labor 
Dr. 

Selling  Expons* 

Advertising 
Dr. 

Other  Expense 
Dr. 

.  •  —  N^_ 

/-^^—  —  J^x 

r 

_^  

~^~*~ 

^  —  — 

^~ 

778.  The  advantages  of  the  voucher  system  are  so  many  that  it  has  been 
adapted  to  meet  the  requirements  of  all  lines  of  business.     It  is  particularly  use- 
ful in  distributing  costs  in  department  accounts,  cost  accounts,  supplementary 
expense  accounts,  and,  in  fact,  all  classes  of  accounts  where  considerable  detail 
is  desired.     It  may  be  used  with  almost  equal  facility  whether  a  cash  or  credit 
business  is  conducted. 

779.  A  voucher,  in  the  ordinary  business  sense,  is  a  name  that  is  applied 
to  any  approved  paper  or  document  which  is  accepted  as  a  truthful  exhibit  of 
business  transactions,  such  as  receipts,  paid  notes,  acceptances  and  checks,  certi- 
fied bills,  invoices,  etc.     A  voucher  is  also  termed  a  "warranty  of  title."    As 
applied  to  the  voucher  system  of  accounts,  it  refers  to  a  printed  form  attached  to 
or  relating  to  bills  purchased,  which  contains  a  statement  certifying  to  the  cor- 
rectness of  the  bills  and  the  purpose  for  which  the  amount  called  for  in  the  voucher 
is  contracted. 


ILLUSTRATION  125 


, 

Pittaburff.    Pa.  .                          19 

Todd  Manufacturing  Co., 
To 

Date 

Description 

Amount 

-"VV/'N/V 

-^•>« 

i~  -*~_^*^— 

11                                         ;  •  —  -nr  ^~^~r~ 

Appro  v« 

id                                         Pres,        E-ramined                                                 Mgr. 

THE  VOUCHER  SYSTEM 
REGISTSB 


268 


780.  Vouchers  are  prepared  in  a  great  variety  of  forms.     In  some  forms, 
the  check  issued  in  payment  of  the  voucher  is  included  as  part  of  it,  while  in  other 
forms  the  check  is  omitted  which,  under  ordinary  conditions,  is  preferable,  as 
voucher  accounts  may  be  paid  by  note  or  in  other  ways,  as  well  as  by  check. 

781 .  Illustration  125  shows  the  open  voucher  or  "folder"  as  it  is  sometimes 
called.     Illustration  126  shows  the  back  of  the  same  voucher  folded,  with  debit 
accounts  indicated. 

782 .  Vouchers  are  recorded  in  a  vouchers  payable  book,  or  vouchers  regis- 
ter.    The  form  of  this  book  varies,  to  conform  with  the  classification  of  accounts 

in  the  general  ledger,  and  usually  contains  a  separate 
column  for  each  account  that  is  likely  to  be  debited, 
with  an  additional  column  to  receive  items  for  which 
a  separate  column  is  not  provided.  Illustration  124 
shows  the  form  of  a  vouchers  payable  book,  designed  to 
receive  the  entries  of  a  manufacturing  business  con- 
ducting a  cost  system  of  accounts,  with  separate  col- 
umns for  the  various  cost  and  expense  accounts  called 
for  in  the  trial  balance  shown  in  illustration  108.  The 
footings  of  these  columns  are  posted  hi  the  general  ledg- 
er to  the  debit  of  the  accounts  named,  at  the  end  of 
each  month,  while  the  total  footing  of  the  vouchers  pay- 
able column  is  posted  to  the  credit  of  vouchers  payable 
account.  The  vouchers  payable  account  is  debited  at 
the  end  of  each  month  from  the  cash  book,  notes  paya- 
ble book  or  other  books  receiving  entries  for  payments 
of  vouchers,  in  each  of  which  a  separate  column  should 
be  kept  to  receive  such  items.  The  balance  of  the 
vouchers  payable  account  in  the  general  ledger  shows 
the  balance  owing  on  unpaid  vouchers,  i.e.,  bills  that 
have  been  vouchered  and  recorded,  but  not  paid. 


Vouch 
Da 

MB§ 

er  No. 

t»  19  _ 

Paid  by 

* 

1UT2RIALS 

V 

PROE.   LABOR.  . 

—  -    . 

_    . 

SELLING  SXP: 

Advertising 
Ctber  Exp. 

mains.  EO>._ 

-  -  -   - 

-    - 



TOOLS  &  1IACH. 





OTHEB  ACGTS. 
Total 

-  -  -- 

ADDITIONAL  REFERENCES  FOR  THE  MERCHANTS' 
CORPORATION  SET. 

NOTE:  These  references  are  taken  from  that  part  of  the  Complete  Text  of 
Rowe's  Bookkeeping  and  Accountancy  not  included  in  the  Advanced  Text.  If 
you  are  using  the  Complete  Text  it  is  unnecessary  to  refer -here. 


T[  36c.  Debit  persons  in  their  accounts  for  all  money  paid  or  loaned  to 
them  on  account,  or  paid  by  us  to  others  at  their  request. 

^|  370.  Credit  persons  in  their  accounts  for  all  checks,  money  or  other 
cash  received  from  them  on  account,  or  paid  by  them  to  others  at  our  request. 

Tf  184.  If  for  any  reason  a  separate  account  for  "freight  in"  is  kept,  it 
will  show  (1)  the  cost  of  freight,  express  and  drayage  charges  paid  on  goods  pur- 
chased, (2)  the  amount  (if  any)  of  these  charges  rebated  and  returned  (over- 
charges, mistakes  in  rating,  etc.),  and  (3)  from  these  the  net  increase  of  cost  to 
the  purchases  account  in  the  trading  statement  is  ascertained,  which  is  shown 
by  the  difference  between  the  two  sides  of  the  account,  which  should  always 
show  a  debit  balance. 

^[  191.  After  goods  are  received  there  are  two  classes  of  items  which  enter 
into  the  cost  of  handling  the  goods  while  in  our  possession  (i.e.,  up  to  the  time  they 
are  ready  for  delivery  to  customers  or  on  board  cars)  which  add  to  the  cost  of 
purchases,  (1)  those  showing  the  cost  of  boxes,  cases,  crates,  packing  materials, 
shipping  tickets,  and  other  items  used  in  preparing  the  goods  for  shipment,  and 
(2)  those  showing  the  cost  of  the  labor  employed.  Separate  accounts  are  usually 
kept  although  both  classes  of  items  may  be  included  in  one  account  under  the 
heading  of  "Warehouse  Expense,"  in  which  case  the  details. may  be  shown  to 
whatever  extent  required  on  an  analysis  sheet,  or  they  may  be  charged  directly 
to  the  purchases  account.  When  separate  accounts  are  kept  they  may  be  desig- 
nated as  warehouse  supplies  and  warehouse  labor. 

1[  192.  Warehouse  Supplies  Account.  The  object  of  this  account  is  to 
show  the  cost  of  shipping  materials  of  every  description  used  in  preparing  the 
goods  for  market  up  to  the  time  they  are  ready  for  delivery,  which  increases  the 
cost  of  the  merchandise  sold  in  the  trading  statement. 

260 


ADDITIONAL   REFERENCES   FOR    MERCHANTS'    CORPORATION   SET  261 

T[  193.  Rule  for  Debiting  and  Crediting  Warehouse  Supplies  Account. 
Debit  the  account  for  the  cost  of  all  materials  used  in  preparing  goods  for  market 
up  to  the  time  they  are  ready  for  delivery.  Credit  the  account  for  any  deductions 
or  rebates  from  the  cost,  or  for  the  value  of  materials  taken  from  the  account. 

1[  21 8a.  Do  purchase  discounts  decrease  the  cost  of  purchases  and  thus 
increase  the  gross  trading  profit,  which  would  class  them  as  trading  profits  to  be 
shown  in  the  trading  statement,  or  (6)  are  they  an  income  derived  from  having 
sufficient  capital  to  discount  bills,  which  would  class  them  as  a  capital  income 
to  be  shown  in  the  profit  and  loss  statement?  NOTE.  The  Howard  &  Winters  Co. 
consider  that  purchase  discounts  is  an  income  from  capital,  because  they  have 
sufficient  capital  invested  to  discount  all  bills  for  goods  purchased,  and  treat  the 
account  as  a  profit  and  loss  account.  They  consider  sales  discounts  as  a  deduc- 
tion from  sales  in  the  trading  statement.  See  page  23  of  the  budget. 

T[  2256.  When  considered  as  a  profit  and  loss  account  showing  an  increase 
in  the  net  profits,  after  the  profit  and  loss  statement  has  been  prepared,  the  pur- 
chase discounts  account  is  closed  by  a  journal  entry  made  up  from  the  items 
appearing  in  the  profit  and  loss  statement. 

If  235.  The  trading  statement  when  properly  made  shows  the  total  cost 
of  purchases  and  also  the  cost  of  merchandise  sold  on  the  debit  side  against  the 
total  or  gross  sales  and  the  net  returns  from  sales  on  the  other  side. 

^[  251.  Profit  and  loss  accounts  are  those  accounts  which  show  the  sources 
of  the  various  expenses  and  incomes  of  every  description  which  result  from  con- 
ducting a  business.  They  all  have  the  effect  of  increasing  or  diminishing  the 
capital  of  the  concern. 

j[  264.  Selling  Expense  Accounts.  All  selling  expenses  may  be  entered 
in  one  account  under  an  appropriate  title,  such  as  "Sales  Expense"  or  "Selling 
Expense."  When  the  various  selling  expenses  are  to  be  shown  separately  in  the 
profit  and  loss  statement,  they  may  be  classified  to  whatever  extent  desired  by 
distributing  them  on  an  analysis  sheet. 

If  266.  Rule  for  Debiting  and  Crediting  Selling  Expense  Accounts.  Debit 
selling  expense  account  for  costs;  credit  for  returns. 

![  268t.  Debit  selling  expense  accounts  under  an  appropriate  title  for 
outward  freight,  express  and  drayage  charges. 


262  BOOKKEEPING   AND   ACCOUNTANCY 

1  272.  Separate  accounts  may  be  kept  with  any  or  all  of  the  various  selling 
expenses  if  so  desired.  When  separate  accounts  are  kept  the  titles  of  the  accounts 
is  determined  by  the  kind  of  expense. 

If  310.  An  expense  is  the  cost  of  any  use  or  service  from  which  no  definite 
permanent  value  is  derived;  the  cost  of  anything  that  is  used  up  in  conducting 
a  business.  General  expenses  consist  of  all  expense  items  which  are  not  included 
in  the  sales,  administrative,  manufacturing  or  other  special  expense  accounts, 
such  as  the  cost  of  rent,  fuel,  light,  taxes,  insurance,  and  miscellaneous  items  of 
similar  character. 

Tf  312.  Rule  for  Debiting  and  Crediting  General  Expense  Accounts.  Debit 
general  expense  accounts  for  costs:  credit  for  returns. 

If  392e.  Credit  real  estate  expense  and  income  account  under  its  appropriate 
title  for  all  returns  in  the  way  of  rents,  sales  of  products  or  other  items  from  the 
property. 

If  445.  Comparisons  of  the  facts  shown  in  the  profit  and  loss  statement 
are  usually  made  on  a  percentage  basis.  The  percentages  are  found  as  follows: 

(a)  The  total  selling  expense  divided  by  the  gross  trading  profit  will  give  the 
percentage  of  the  gross  trading  profit  required  to  meet  the  selling  expenses. 

(6)  The  total  administrative  expense  divided  by  the  gross  trading  profit 
will  give  the  percentage  of  the  gross  trading  profit  required  to  meet  administrative 
expenses. 

(c)  The  total  general  expense  divided  by  the  gross  trading  profit  will  give 
the  percentage  of  the  gross  trading  profit  required  to  meet  general  expenses. 

(d)  The  percentage  of  the  gross  profit  required  to  meet  any  other  expenses 
may  be  found  in  the  same  manner. 

(e)  The  total  selling  expense  divided  by  the  cost  of  the  merchandise  sold 
will  give  the  percentage  of  the  cost  price  which  must  be  added  to  meet  selling 
expenses.     The  percentage  to  be  added  to  the  cost  price  of  the  merchandise  sold 
to  meet  administrative  or  any  other  expenses  may  be  found  in  the  same  manner. 
These  percentages  are  useful  in  fixing  the  selling  prices  of  goods. 

NOTE.  These  percentages  must  not  be  confused  with  the  percentages  on 
capital. 

If  464.  Inventories.  The  merchandise  inventory  is  a  statement  or  schedule 
of  merchandise  on  hand  or  in  stock.  This  inventory  is  the  only  inventory  to  be 


ADDITIONAL   REFERENCES   FOR   MERCHANTS'    CORPORATION    SET  263 

included  in  the  principal  inventory  account,  which  is  a  trading  account  and  affects 
the  trading  statement. 

U  465.  Other  inventories  consist  of  (a)  all  material,  supplies  or  other  prop- 
erty on  hand  that  has  been  charged  to  a  trading  or  a  profit  and  loss  account  and 
that  has  not  been  used  up  or  otherwise  disposed  of  in  the  fiscal  period  in  which 
it  was  purchased,  and  (b)  of  interest,  taxes,  rents,  commissions,  or  other  expenses 
and  incomes  which  have  accrued  at  the  close  of  the  fiscal  period,  but  which  are 
not  entered  on  the  books  and  frequently  are  not  due.  For  this  reason  this  class 
of  inventories  are  known  as  non-ledger  inventories. 

f  465a.  Real  estate,  stocks,  bonds,  machinery,  furniture,  fixtures,  materials 
and  supplies  which  are  included  in  the  various  ledger  accounts  showing  the  original 
cost  of  the  property  on  hand,  may  be  inventoried  when  there  is  a  considerable 
increase  or  decrease  between  the  original  cost  value  and  the  present  market  or 
selling  value  of  the  property,  if  it  is  desired  to  include  such  property  at  its  present 
value  in  a  statement  of  the  resources  of  a  business. 

T[  4656.  When  property  on  hand  is  inventoried  above  or  below  its  original 
cost  value,  the  difference,  if  a  loss,  should  be  debited  to  a  "reserve  for  depreciation" 
account;  if  a  gain,  to  a  "reserve  for  appreciation"  account.  An  owner,  if  an  indi- 
vidual, can  do  as  he  pleases  in  regard  to  increasing  or  decreasing  the  inventory 
value  of  the  property,  so  can  partners  providing  they  agree,  but  it  should  be  noted 
that  a  corporation  cannot  declare  a  dividend  legally  from  a  profit  of  this  kind 
unless  the  property  is  sold  and  the  profit  actually  realized. 

1f  466.  The  object  of  taking  inventories  of  property  included  in  the  cost 
of  purchases  (the  merchandise  inventory)  and  of  materials  and  supplies  (trading 
and  profit  and  loss  accounts)  is  to  eliminate  from  the  accounts  representing  these 
costs  those  items  which  do  not  enter  into  the  cost  of  the  goods  sold  or  of  the 
materials  and  supplies  used  up  during  the  fiscal  period  in  which  they  were  purchased. 
The  object  of  taking  non-ledger  inventories  is  just  the  opposite,  the  purpose  being 
to  include  them  in  the  accounts  they  affect  which  already  appear  in  the  ledger 
without  them,  so  that  in  both  instances  the  total  resources  and  liabilities,  losses 
and  gains,  net  profits  and  losses,  etc.,  may  be  accurately  ascertained  and  shown 
in  the  various  statements  made  up  at  the  close  of  the  fiscal  period. 

*[f  466a.  All  inventories  affecting  profit  and  loss  accounts  should  be  avoided 
as  far  as  possible  by  holding  the  books  open  until  all  items  belonging  to  the  fiscal 
period  represented  are  entered  in  the  usual  way  and  included  in  the  final  trial 
balance  taken  preparatory  to  making  up  the  various  statements.  Every  book- 
keeper or  accountant  who  has  had  any  extended  experience  knows  however,  that 


264  BOOKKEEPING  AND   ACCOUNTANCY 

this  is  almost  impossible  in  a  business  of  any  magnitude,  and  that  for  many  such 
items  the  easiest  method  to  dispose  of  them  is  to  treat  them  as  inventories. 

H  467.  All  inventories  of  property  on  hand  or  of  debts  owing  to  us  are 
resources;  all  debts  owing  to  others  are  liabilities. 

H  468.  Non-ledger  resource  and  liability  inventories  relate  principally 
to  profit  and  loss  accounts  showing  expenses  and  incomes.  When  an  expense 
account  is  sub-divided  into  separate  accounts,  each  item  in  the  inventory  affects 
the  account  in  which  it  was  originally  charged. 

Tf  468a.  Resource  inventories  affecting  profit  and  loss  accounts  consist 
of  (1)  the  cost  value  of  any  material,  supplies,  or  other  property  on  hand  (not  used 
up)  at  the  clo.  e  of  the  fiscal  period,  which  was  charged  to  a  profit  and  loss  account, 
(a)  the  unexpired  value  of  any  use  or  service  at  the  close  of  the  fiscal  period  which 
was  charged  to  a  profit  and  loss  account  and  (3)  accrued  interest,  rent,  and  com- 
missions, etc.,  owing  from  others  and  not  entered  at  the  close  of  the  fiscal  period. 

TI  4686.  Liability  inventories  affecting  profit  and  loss  accounts  consist  of 
(1)  unpaid  salaries,  commissions,  traveling  expenses,  wages,  freight,  express  or 
drayage  bills,  rent,  or  any  other  unpaid  expense  incurred  in  and  not  paid  or  entered 
at  the  close  of  the  fiscal  period,  and(2)  accrued  interest,  rent,  taxes,  commissions, 
etc.  owing  to  others  and  not  entered  at  the  close  of  the  fiscal  period. 

Tf  468c.  Separate  accounts  should  be  kept,  one  for  sundry  resource  inven- 
tories in  which  all  such  inventories  may  be  grouped,  the  account  affected  being 
indicated  in  the  explanation  column,  and  another  for  sundry  liability  inventories, 
the  different  accounts  affected  being  similarly  indicated.  Separate  accounts  for 
each  inventory  taken  can  be  opened,  if  it  is  so  desired. 

1f  469  and  ^  470.  Rules  for  Debiting  and  Crediting  Resource  Inventories 
Affecting  Profit  and  Loss  Accounts.  Debit,  by  journal  entry,  sundry  resource 
inventories  under  one  or  separate  headings,  at  the  close  of  each  fiscal  period,  for 
the  cost  value  of  all  inventories  on  hand,  and  credit  the  profit  and  loss  account  to 
which  the  items  were  charged. 

Credit,  by  journal  entry,  sundry  resource  inventories  under  the  proper  head- 
ing, at  the  beginning  or  close  of  the  next  fiscal  period,  for  all  inventories  debited 
to  this  account  at  the  close  of  the  last  preceding  fiscal  period,  and  debit  each 
account  which  was  credited  at  that  time. 

H  472  and  ^  473.  Rule  for  Debiting  and  Crediting  Liability  Inventories 
Affecting  Profit  and  Loss  Accounts.  Debit,  by  journal  entry,  sundry  liability 


ADDITIONAL   REFERENCES    FOR   MERCHANTS'    CORPORATION    SET  265 

inventories,  under  the  proper  heading  at  the  beginning  or  close  of  the  next  fiscal 
period,  for  all  inventories  credited  to  this  account  at  the  close  of  the  last  preceding 
fiscal  period,  and  debit  each  account  which  was  credited  at  that  time. 

Credit,  by  journal  entry,  sundry  liability  inventories  under  one  or  separate 
headings  at  the  close  of  each  fiscal  period,  for  the  amount  owed  for  expenses  which 
have  accrued,  and  which  have  not  been  entered  on  the  books,  debiting  the  proper 
accounts. 

SHIPMENT  ACCOUNTS. 

H  503.  The  record  of  a  shipment  is  kept  in  the  books  of  the  consignor  under 
the  title  of  "Shipment." 

^  504.  There  are  two  general  methods  of  keeping  shipment  accounts. 
One  is  to  open  a  separate  account  for  each  shipment,  adding  the  name  of  the 
party  to  whom  the  shipment  is  made,  for  instance,  "  Shipment  to  Wm.  F.  Day  & 
Sons,  Chicago."  Where  more  than  one  shipment  is  made  to  the  same  party, 
they  may  be  numbered  as  No.  1,  No.  2,  etc.  Another  method  is  to  open  a  general 
"goods  on  consignment"  account,  to  which  all  the  items  relating  to  the  various 
shipments  are  credited  and  debited,  with  a  separate  account  with  each  shipment 
entered  as  a  memorandum  account  in  a  special  book  kept  for  that  purpose.  The 
last  method  does  not  differ  from  the  first  method,  except  that  it  shows  in  one 
account  the  same  results  that  would  be  shown  in  a  number  of  accounts  under  the 
first  method. 

T[  505.  The  object  is  to  ascertain  the  amount  gained  or  lost  on  our  different 
shipments  of  goods  to  others  for  sale  on  commission.  When  account  sales  are 
received  for  but  part  of  the  goods  shipped,  in  closing  the  shipment  account  those 
remaining  unsold  in  the  hands  of  the  consignee  are  treated  as  an  inventory  balance, 
under  the  designation  "Goods  on  consignment,"  exactly  as  in  a  merchandise 
account,  until  an  account  sales  for  the  remainder  of  the  shipment  is  received. 

Tf  506.  When  goods  are  shipped  on  consignment,  they  are  usually  entered 
by  the  shipper  on  the  invoice  of  shipment  at  cost  price,  although  sometimes  the 
market  or  selling  price  is  given.  Not  infrequently  in  such  lines  of  business  as 
those  conducted  by  stockmen,  dairymen,  fruit  growers  and  gardeners,  where  the 
cost  price  of  the  goods  shipped  is  not  definitely  known,  no  orices  whatever  are  given 
on  the  invoice  of  shipment.  Full  details  of  the  practices  common  among  shippers 
and  commission  merchants  are  given  in  the  commission  set  accompanying  this 
work. 

H  506a.  It  is  not  unusual,  particularly  when  only  occasional  shipments 
are  made,  to  omit  opening  a  separate  ledger  account  for  them.  Instead  a  memor- 


2(H> 


BOOKKEEPING   AND   ACCOUNTANCY 


anduhi  record  of  each  shipment  is  made  in  a  separate  shipment  book  kept  for  that 
purpose.  The  record  is  a  practical  reproduction  of  the  invoice  of  shipment. 
When  the  account  sales  is  received  the  proceeds  are  credited  to  sales  account,  the 
same  as  a  regular  sale.  At  the  same  time  a  record  of  the  proceeds  is  entered  in 
the  shipment  book,  which  will  then  show  the  shipment  closed.  The  loss  or  gain 
on  each  shipment  can  be  ascertained,  if  desired.  When  this  method  is  followed, 
the  value  of  the  goods  for  which  account  sales  have  not  been  received  must  be 
added  to  the  inventory  at  the  time  of  closing  the  books,  being  designated  as 
"goods  on  consignment."  This  method  is  not  recommended,  as  it  is  liable  to 
lead  to  confusion  and  inaccuracies  in  the  trading  statement, 


RULE  FOR  DEBITING  AND  CREDITING  SHIPMENT  ACCOUNTS. 
507.     Debit  shipment  accounts  for  costs:  credit  for  returns. 


507a.     Debit   the   shipment,    under  an 
appropriate  title,  for  all  costs. 


5076.     Credit  the  shipment,  under    an 
appropriate  title,  for  all  returns. 


508.     The  various  applications  of  the  rule  are  as  follows: 


509.     Debit  shipments, — 
For   the   invoice    (generally   the   cost) 
value  of  the  goods  shipped. 
For  all  charges,  such  as  drayage,  insur- 
ance, freight  prepaid,  etc. 
For  drafts  drawn  on  us  or  for  cash  ad- 
vanced by  us  on  account  of  the  ship- 
ment. 


511.  Observe  that  in  every  instance  the 
account  is  debited  for  the  cost  of  any- 
thing of  value  relating  to  the  shipment. 


^  510.     Credit  shipments, — 

d.  For  all  drafts  drawn  by  us  or  other  ad- 
vances made  to  us  on  account  of   the 
shipment. 

e.  For   all   returns    (proceeds)   when  ac- 
count sales  are  received. 

/.  For  all  goods  returned  for  which  the 
shipment  had  been  previously  debited, 

g.  For  insurance  received  on  goods  dam- 
aged or  destroyed. 

^[  512.  Observe  that  in  every  instance 
the  account  is  credited  for  the  returns 
from  anything  of  value  relating  to  the 
shipment. 


^[  513.  It  will  be  observed  that  a  shipment  account  is  similar  to  a  personal 
account  in  many  respects.  It  is  debited  when  the  agent  is  the  receiver  of  any- 
thing of  value  from  us  and  is  credited  when  he  is  the  giver  of  anything  of  value  to 
us.  The  difference  between  the  two  sides  of  the  account,  however,  shows  a  loss 
or  a  gain  to  us,  instead  of  a  resource  or  liability  as  in  a  personal  account. 

Tf  514.  Acting  on  the  principle  that  the  consignee  is  responsible  for  all 
goods  consigned  to  him  until  an  account  sales  has  been  received  or  a  settlement 


ADDITIONAL   REFERENCES   FOR  MERCHANTS*    CORPORATION   SET  267 

made,  many  bookkeepers  follow  the  practice  of  charging  the  personal  account  of 
the  consignee  with  the  value  of  the  shipment  and  charges  until  an  account  sales 
with  returns  is  received,  when  the  personal  account  of  the  consignee  is  credited 
to  close,  with  the  difference  transferred  to  the  profit  and  loss  account  or  to  a 
separate  account  under  an  appropriate  title,  such  as  "Shipment  Gains  &  Losses." 
For  occasional  shipments  this  method  is  approved. 

To  CLOSE  SHIPMENT  ACCOUNT. 

Tf  515.  The  difference  between  the  two  sides  of  a  shipment  account,  before 
an  account  sales  has  been  received  and  returns  (proceeds)  credited,  will  show  a 
balance  which  is  a  resource;  after  an  account  sales  has  been  received  for  all  the 
goods  shipped  and  the  proceeds  credited  to  the  account,  the  difference  will  show 
a  gain  or  a  loss — a  gain  if  the  credit  side  is  the  larger,  a  loss  if  the  debit  side  is  the 
larger. 

1[  516.  If  an  account  sales  is  received  before  all  the  goods  are  sold,  and  the 
shipment  account  is  credited  for  the  returns  (proceeds)  shown  by  the  account 
sales  for  that  portion  of  the  goods  which  has  been  sold,  the  difference  between 
the  two  sides  of  the  account,  after  the  account  is  credited  "by  inventory"  for  the 
value  of  the  goods  remaining  unsold  in  the  hands  of  the  consignee,  will  show  the 
gain  or  the  loss  on  the  goods  sold  and  reported  in  the  account  sales.  The  inventory 
is  considered  as  a  sundry  resource  inventory  described  in  Tf  468a,  the  shipment 
account  being  credited  for  the  amount. 

1[  517.  To  close.  After  the  trading  statement  has  been  prepared,  ship- 
ment accounts  are  closed  by  a  journal  entry  made  up  from  the  trading  statement. 
When  the  closing  item  for  any  shipment  account  has  been  posted,  which  should 
balance  the  account,  rule  the  closing  lines  in  red  ink  and  enter  the  footings  in 
black  ink. 

CONSIGNMENT  ACCOUNTS. 

1[  518.  Consignment  accounts  (or  "commission  sales"  as  they  are  called  by 
most  commission  merchants)  differ  in  several  important  particulars  from  shipment 
accounts.  When  an  agent  receives  goods  to  sell  on  commission,  he  does  not  in 
any  sense  buy  them,  and  when  he  expends  money  upon  them  in  paying  the  freight, 
drayage  or  other  charges,  and  debits  the  consignment,  he  does  so,  it  is  true,  with 
the  idea  that  the  property  received  is  "good  for  it,"  and  with  the  expectation 
that  he  will  get  his  money  back  from  the  proceeds  of  sales,  but  nevertheless  with 


268  BOOKKEEPING  AND   ACCOUNTANCY 

a  knowledge  of  the  fact  that  the  consignor  (shipper)  is  personally  responsible  to 
him  (the  agent)  for  all  such  expenditures  and  also  his  charges  (commission,  etc.) 
for  selling.  On  the  other  hand,  the  consignor  looks  to  the  consignee  (agent)  as 
being  personally  responsible  to  him  for  the  proper  care  of  the  goods  while  in  his 
possession,  as  well  as  for  any  proceeds  that  the  shipment  may  return  to  him. 

If  519.  A  change  takes  place,  however,  in  the  relations  existing  between 
the  consignee  and  the  consignor  the  moment  the  goods  are  sold.  Prior  to  that 
time  the  consignee  is  not  responsible  for  the  value  of  the  goods,  nor  could  he  be 
held  responsible  for  any  loss  that  might  occur  so  long  as  he  exercises  ordinary 
diligence  in  their  care;  but  the  moment  the  goods  are  sold,  the  consignee  becomes 
directly  indebted  and  is  personally  responsible  to  the  consignor  for  the  value  of 
the  goods  sold  after  his  charges  have  been  deducted.  Even  if  he  sells  the  goods 
on  credit  and  the  party  to  whom  he  sells  should  fail,  he  is  still  held  responsible 
to  the  consignor.  He  may,  however,  deduct  a  certain  percentage  for  taking  such 
risk,  unless  the  consignor  instructed  him  to  sell  for  cash  only, 

1f  520.  Consignment  accounts,  therefore,  in  reality  closely  resemble  per- 
sonal accounts.  When  the  consignment  is  debited,  the  consignor  would  be  debited 
if  he  received  the  value  direct  from  the  consignee,  and  when  the  consignment  is 
credited,  the  consignor  would  be  credited  if  he  gave  the  consignee  the  value  direct. 
The  consignment  account,  therefore,  represents  the  consignor. 

11  521.  Consignment  accounts  are  not  debited  for  the  value  of  the  goods 
received  but  only  (a)  for  outlays  made  on  account  of  consignments,  such  as  freight, 
drayage,  advances,  etc.,  (6)  when  account  sales  are  rendered  for  commissions,  or 
other  charges  deducted,  and  (c)  for  the  net  proceeds.  The  account  is  credited 
for  all  sales. 

1f  522.  Consignment  accounts  are  kept  under  a  designating  title,  such  as 
"6.  B.  Wharton's  Consignment,  Columbus,  O."  and  if  different  consignments  are 
received  from  the  same  party,  they  should  be  numbered  consecutively.  In  com- 
mission houses  it  is  usually  the  custom  to  number  all  consignments  in  the  order 
received  and  thereafter  to  refer  to  each  consignment  by  number. 

f  522a.  Those  who  make  a  specialty  of  selling  goods  on  commission  are 
known  as  "commission  merchants."  When  they  sell  stocks,  bonds  and  other 
securities,  they  are  called  "brokers." 


ADDITIONAL   REFERENCES   FOR   MERCHANTS     CORPORATION   SET 


269 


RULE  FOR  DEBITING  AND  CREDITING  CONSIGNMENT  ACCOUNTS. 
523.     Debit  consignment  accounts  for  costs:  credit  for  returns. 


523a.     Debit  the  consignment  under  an 
appropriate  title  for  all  costs. 


5236.     Credit  the  consignment,  under  an 
appropriate  title  for  all  returns. 


524.     The  various  applications  of  the  rule  are  as  follows : 


Tf  525.     Debit  consignments, — 

a.  At  the  time  received,  for  all  charges 
paid  such  as  freight,  dray  age,  etc. 

6.  When  on  hand,  for  all  charges  of  coop- 
erage, boxing,  bagging,  repacking,  ad- 
vertising, or  other  outlays  necessary 
for  the  preservation  of  or  for  effecting 
the  sale  of  goods. 

c.  For  all  goods  returned  to  us  after  hav- 
ing been  sold  and  credited  to  the  con- 
signment, and  for  shortage,  damage  or 
overcharge    claims    allowed    on    goods 
previously  sold. 

d.  For  all  drafts  accepted  or  paid,  or  for 
other  advances  made  on  account  of  the 
consignment. 

e.  When  account  sales  are  rendered,  for 
our  charges,  such  as  commissions,  in- 
surance, storage,  guarantee,  etc. 

/.  For  the  consignor's  proceeds  remitted 
with  the  account  sales  or  credited  to 
his  personal  account. 

^f  527.  Observe  that  in  every  instance  the 
account  is  debited  for  the  cost  to  the 
consignor  of  all  outlays,  advances,  etc., 
made  on  account  of  the  consignment  by 
the  consignee,  and  for  his  charges  and 
for  the  proceeds  remitted  or  credited 
to  the  consignor. 


If  526.     Credit  consignments, — 

g.     For  all  sales  of  goods  belonging  to  them. 

h.     For    all    rebates    for    overcharges    on 

freight,    drayage,    etc.,    or    for    other 

charges  rebated,  previously  debited  to 

the  account. 
i.     When  the  charges  exceed  the  total  sales, 

for  the  amount  to  close  the  account 

(owed  by  the  consignor). 


528.  Observe  that  in  every  instance  the 
account  is  credited  for  the  returns 
from  sales,  allowances,  etc.,  received 
by  the  consignee  for  the  account  of  the 
consignment. 


1f  529.  In  a  regular  commission  business,  consignment  accounts  are  kept 
in  special  books  and,  therefore,  do  not  appear  separately  in  the  ledger.  In  some 
systems  of  commission  accounting,  controlling  accounts  are  kept  in  the  general 
ledger.  The  latest  and  best  methods  in  commission  accounting  are  fully  explained 
in  the  regular  commission  set  accompanying  this  text. 


270  BOOKKEEPING   AND   ACCOUNTANCY 

To  CLOSE  CONSIGNMENT  ACCOUNTS. 

H  530.  The  object  is  to  ascertain  the  amount  of  the  consignor's  proceeds 
and  the  consignee's  compensation,  such  as  commissions,  storage,  guarantee,  etc. 

H  531.  Before  closing  it  is  customary  (1)  to  prepare  the  account  sales, 
(2)  then  to  make  the  proper  entries  for  the  charges,  etc.,  and  for  the  net  proceeds, 
after  which  the  proceeds  are  remitted  or  credited  to  the  consignor. 

H  532.  To  prepare  the  account  sales.  From  the  consignment  account  it  is 
customary  to  make  out  the  account-sales  as  follows:  (a)  fill  out  the  heading  of 
the  account-sales;  (6)  from  the  credit  side  of  the  consignment  account  enter  the 
amount  of  sales,  referring,  if  necessary,  to  the  books  of  original  entry  for  the  items; 
(c)  from  the  debit  side  of  the  account  enter  the  amount  of  the  charges  already 
paid;  (d)  calculate  and  enter  on  the  account-sales  the  charges  for  commission, 
insurance,  storage,  guarantee,  etc.;  (e)  deduct  the  total  charges  from  the  total 
sales,  which  will  give  the  proceeds  belonging  to  the  consignor. 

If  533.  To  close.  When  the  account  sales  has  been  prepared,  it  will  be 
observed  that  the  entries  for  the  sales  and  for  the  freight  and  other  charges  al- 
ready paid*have  been  made  in  the  books,  and  the  only  entries  that  remain  to  be 
made  are  for  the  commission  and  other  charges,  and  for  the  proceeds,  which  are 
not  determined  until  the  account  sales  is  prepared.  Therefore,  to  close  the  ac- 
count, make  the  proper  entry  for  the  charges  not  yet  entered,  and  for  the  proceeds 
if  they  are  to  be  credited  to  the  consignor's  account.  If  the  proceeds  are  to  be 
remitted,  write  the  check  or  note  or  other  paper  for  the  proper  amount  and  make 
the  proper  entries  for  the  same.  When  these  are  posted,  the  consignment  account 
should  balance,  when  the  proper  closing  lines  and  footings  should  be  entered. 

COMMISSION"  ACCOUNT. 

H  534.  Commission  is  a  percentage  charged  by  commission  merchants, 
agents,  or  brokers  for  services  in  buying  and  selling  merchandise,  real  estate, 
stocks,  bonds,  mortgages,  insurance,  or  other  forms  of  property.  This  account  is, 
therefore,  a  service  account.  It  is  debited  for  the  cost  of  all  commission  services 
received  (which  we  .pay  for)  and  credited  for  the  returns  from  all  commission 
services  given.  When  commissions  from  various  sources  are  to  be  shown  sepa- 
rately in  the  profit  and  loss  statement,  they  may  be  classified  to  whatever  extent 
desired  by  distributing  them  on  an  analysis  sheet. 


ADDITIONAL  REFERENCES  FOR  MERCHANTS'  CORPORATION  SET  271 

RULE  FOR  DEBITING  AND  CREDITING  COMMISSION  ACCOUNTS. 
T[  535.     Debit  commission  accounts  for  costs:  credit  for  returns. 

^  536.     Debit  commission  account,  under  ^f  537.     Credit  commission  account,  under 

the  proper  heading, —  the  proper  heading, — 

a.  For  the  value  of  all  commission  services  c.     For  the  value  of  all  commission  services 
earned  and  unpaid,  owed  to  us  by  oth-  earned  and  unpaid,  owed  to  others  by 
ers  at  the  beginning  of  business.  us  at  the  beginning  of  business. 

b.  For  the  value  of  commission  services  d.     For  the  value  of  commission  services 
received  from  others  and  paid  for  by  us  given  to  others  for  which  they  pay  us 
or  credited  to  them.  or  we  debit  them. 

^[  538.     Observe  that  in  every  instance  the  ![  539.     Observe  that  in  every  instance  the 

account  is  debited  for  the  cost  of  com-  account  is  credited  for  the  returns  from 

mission  services  received.  commission  services  given. 

Tf  540.  The  difference  between  the  two  sides  of  a  commission  account 
shows  a  loss  when  the  debit  side  is  the  larger  and  a  gain  when  the  credit  side  is  the 
larger. 

^[  541.  To  close.  After  the  profit  and  loss  statement  has  been  prepared, 
commission  accounts  are  closed  by  a  journal  entry  made  up  from  the  profit  and 
loss  statement.  When  the  closing  item  to  a  commission  account  has  been  posted, 
which  should  balance  the  account,  rule  the  closing  lines  in  red  ink,  and  enter  the 
footings  in  black  ink. 

^f  549.  Stocks  and  bonds.  A  general  account  may  be  kept  under  this 
title,  or  a  separate  account  may  be  kept  with  each  kind  of  stocks  or  bonds  purchased 
such  as  "Penna.  R.  R.  Stock,"  or  "U.  S.  Bonds."  The  account  is  debited  for 
all  costs  and  credited  for  all  returns,  and  is  kept  exactly  like  property  investment 
accounts,  a  separate  expense  and  income  account  being  kept  for  any  outlays  or 
returns  in  the  shape  of  taxes,  dividends,  interest,  etc. 

^f  5546.  When  the  purchaser  is  an  individual  or  firm,  the  account  is  usu- 
ally credited  at  the  close  of  each  fiscal  period  for  such  proportion  of  the  amount 
debited  as  may  be  determined  upon  by  the  owners,  v/hich  should  be  charged  to 
profit  and  loss  and  should  appear  as  a  separate  item,  in  the  profit  and  loss 
statement. 

^f  554c.  The  difference  shown  by  a  good-will  account  is  considered  as  a 
fixed  resource  (asset),  since  its  value  is  fixed  and  it  cannot  be  used  us  working 
capital.  Good-will  is  taxable  in  some  states.  It  should  appear  in  the  statement 
of  resources  and  liabilities.  If  treated  as  indicated  in  ^  554b,  the  account  will 


272  BOOKKEEPING    AND    ACCOUNTANCY 

eventually  disappear;  and  it  is  generally  preferred  by  business  men  that  it  should 
be  wiped  off  the  books  as  soon  as  possible,  certainly  as  soon  as  the  good-will  of  the 
old  concern  can  fairly  be  considered  as  being  merged  into  the  new  concern. 

Tf  556.  Agents'  accounts.  The  method  of  keeping  these  accounts  varies, 
depending  upon  the  contract  made  with  the  agent.  In  case  his  duties  are  limited 
to  those  of  a  salesman  or  "  drummer, "  his  account  is  not  different  from  an  ordinary 
personal  account,  being  debited  for  all  cash  or  goods  advanced  to  him  and  credited 
for  the  amount  of  his  expenses  as  per  his  expense  bills,  and  also  for  his  salary  or 
commission  at  stated  intervals.  In  this  case  the  account  shows  what  he  owes  or 
what  is  owed  to  him,  and  the  balance  is,  therefore,  a  resource  or  a  liability.  If, 
however,  he  acts  as  a  resident  agent  in  another  city  and  goods  are  shipped  in  his 
care,  it  is  the  best  practice  to  open  a  separate  account  for-the  goods,  which  is  in 
every  way  kept  and  closed  like  a  shipment  account,  as  described  in  j[  503,  ^f  515 
etc. 

1f  557.  Reserve,'  surplus  and  undivided  profits  accounts.  These  are 
accounts  which  are  usually  opened  in  the  books  of  stock  companies  or  corporations 
to  show  the  amount  of  the  annual  profits  which  have  been  retained  in  the  working 
capital  of  the  business  for  special  purposes  and  not  distributed  among  the  stock- 
holders. Such  accounts  usually  show  credit  balances. 

^[  557a.  Reserve  account,  setting  apart  a  sufficient  amount  of  the  profits 
to  meet  any  contingent  expense  or  loss  of  the  business,  may  be  opened  to  offset 
charges  against  profits,  such  as  bad  debts,  depreciation,  etc.  A  reserve  account 
is  credited  for  the  amount  of  the  profits  set  apart  for  the  particular  purpose  indi- 
cated in  the  title  of  the  account.  It  is  debited  for  such  sums  as  are  necessary  to 
meet  the  purpose  for  which  the  profits  were  reserved. 

^f  5576.  Surplus  and  undivided  profits  are  practically  synonymous  ac- 
counts, both  showing  profits  belonging  to  the  owners  which  have  not  been  dis- 
tributed. Surplus  account,  however,  is  generally  understood  to  represent  that 
part  of  the  profits  which  has  been  set  apart  as  a  permanent  addition  to  the  working 
capital.  Undivided  profits  account  generally  represents  that  part  of  the  net 
profits  which  is  "  left  over  "  after  the  different  sums  for  the  various  reserve,  dividend , 
surplus  and  other  accounts  have  been  set  apart  and  deducted.  Surplus  and  un- 
divided profits  accounts  are  credited  for  the  amounts  of  the  profits  set  apart  for 
the  purpose  indicated  in  the  title  of  the  account.  They  are  debited  when  the 
purposes  for  which  they  were  opened  have  been  accomplished. 

If  558.  Sinking  and  redemption  funds,  etc.  "A  fund"  may  be  created  for 
a  number  of  purposes,  among  them,  (1)  to  liquidate  a  known  existing  liability, 


I 

ADDITIONAL   REFERENCES    FOR   MERCHANTS'    CORPORATION   SET  273 

such  as  bonded  indebtedness,  (2)  to  provide  an  available  or  quick  asset  to  meet 
a  specific  future  obligation,  such  as  plant  renewal  or  betterment,  and  (3)  to  pro- 
vide against  any  embarrassing  contingency  or  unexpected  losses.  These  funds 
are  usually  taken  out  of  the  cash  assets  of  the  business,  and  may  be  deposited  in 
a  separate  bank  account  or  converted  into  interest-bearing  securities  or  other 
form  ,of  property  which  will  earn  an  income,  or  they  may  be  transferred  to  a 
trustee  or  other  agent  who  shall  invest  them  in  such  securities  or  make  such  dis- 
position of  them  as  is  required  by  the  agreement  with  the  trustee  or  agent.  Two 
classes  of  accounts  a*re  required  for  the  proper  record  of  such  funds,  one  class 
representing  the  profits  set  part  for  the  creation  of  these  funds,  which  are  known 
as  fund  reserve  accounts.  These  accounts  are  similar  to  those  described  in  f  557a, 
except  that  they  include  in  their  titles  the  name  of  the  corresponding  fund  account 
to  which  they  belong.  The  other  class  shows  the  investment  or  disposition  of 
these  funds  (the  actual  cash  or  equivalent)  which  are  known  as  sinking  or  redemp- 
tion fund  accounts,  of  which  several  accounts  may  be  required  to  show  the  trans- 
actions in  relation  to  a  single  sinking  or  redemption  fund.  In  large  corporations 
a  separate  set  of  bookg  is  usually  kept  to  contain  the  sinking  fund  accounts.  In 
both  classes  of  accounts,  the  identity  of  the  fund  to  which  such  accounts  belong 
should  be  indicated  in  the  title,  such  as  "Sinking  Fund  Reserve,"  "Redemption 
Fund  Reserve,"  "Bonds  in  Sinking  Fund,"  "Sinking  Fund  Trustee,"  etc.  It 
should  be  remembered  that  the  reserve  accounts  show  the  amount  of  the  profits 
that  has  been  set  apart  for  the  creation  of  the  fund,  \vhile  the  fund  accounts  show 
the  investment  or  disposition  that  has  been  made  of  the  fund;  consequently,  they 
are  contra  accounts,  one  offsetting  the  other  in  purpose,  although  they  may  differ 
in  the  amounts  shown  in  each  account  at  a  given  time.  Hence,  reserve  accounts 
usually  show  credit  balances,  while  fund  accounts  usually  show  debit  balances. 

^[  559.  Bonus  accounts.  Frequently  in  organizing  the  affairs  of  corpor- 
ations it  is  necessary  to  offer  a  bonus  to  secure  the  services  of  promoters,  effect 
sales  of  stock,  or  secure  a  franchise  or  a  charter.  In  such  cases  a  bonus  account  is 
opened,  which  is  debited  for  the  value  of  all  such  bonuses  allowed.  This  account 
is  similar  to  good-will  and  leasehold  accounts.  A  certain  proportion  of  the  amount 
charged  to  the  account  should  be  closed  off  into  profit  and  loss  at  the  close  of  each 
fiscal  period,  until  the  account  is  finally  wiped  out  and  closed. 

^[  560.  Patent  and  coypright  accounts.  These  accounts  are  kept  under 
two  conditions. 

(1)  When  a  patent  or  copyright  is  purchased,  the  account,  under  an  appropri- 
ate title,  is  debited  for  the  cost  of  the  patent  or  copyright.  When  all  or  any  part 
of  the  patent  or  copyright  is  sold  or  otherwise  disposed  of,  the  account  is  credited 
at  the  cost  value  of  what  is  sold,  i.e.,  for  the  original  price  charged  to  the  account. 


274  BOOKKEEPING    AND    ACCOUNTANCY 

It  must  be  remembered,  however,  that  both  patents  and  copyrights  eventually 
expire  as  determined  by  law,  and  that,  consequently,  their  value  is  decreased  year 
by  year.  The  account  should,  therefore,  be  credited  annually  for  the  proportion- 
ate part  of  the  cost  which  has  been  eliminated  by  the  passage  of  time.  The 
amount  of  such  decrease,  when  credited  to  the  investment  account,  is  debited  to 
the  income  account,  or  to  a  separate  account,  or,  in  the  absence  of  these,  to  profit 
and  ioss  account.  Preferably,  such  amounts  should  appear  as  separate  items  in 
the  profit  and  loss  statement. 

(2)  When  only  the  right  or  privilege  is  secured  to  manufacture  or  sell  an 
article  under  a  copyright  or  a  patent  upon  payment  of  a  percentage  or  royalty, 
the  account  is  kept  for  the  purpose  of  showing  the  cost  of  the  royalties  paid.  This 
cost  is,  therefore,  a  part  of  the  cost  of  the  article  manufactured  or  sold,  and,  con- 
sequently, properly  belongs  to  the  trading  statement.  A  separate  account  may 
be  kept  under  an  appropriate  title,  or  the  royalties  paid  may  be  charged  directly 
to  the  principal  account  showing  the  cost  of  the  goods  manufactured  or  sold. 

If  561.  Dividend  account.  This  is  an  account  opened  in  the  books  of 
corporations  and  stock  companies  when  profits  are  to  be  divided  among  the  stock- 
holders. A  separate  account  is  generally  opened  for  each  dividend  declared,  as 
"Dividend  No.  1,"  "Dividend  No.  2,"  and  is  kept  for  the  purpose  of  showing  the 
amount  of  each  dividend  declared  and  also  to  show  the  amount  of  the  different 
dividends  that  have  been  paid  to  stockholders. 


ADDITIONAL   REFERENCES   FOR   COST  ACCOUNTANCY   SET  275 

The  following  paragraphs  contained  in  the  complete  text  of  Rowe's  Book- 
keeping and  Accountancy  but  not  in  the  Cost  Set  text  are  referred  to  in  the  Cost 
Accountancy  for  Manufacturing  Set.  Refer  to  this  page  for  references  below 
paragraph  617  if  the  complete  text  is  not  used. 

^[  331.       Debit  insurance  account  for  costs,  credit  for  returns. 

Tf  299.       Debit  administration  expense  for  costs;  credit  for  returns. 

^[  301c.  Debit  administration  expense  for  office  supplies,  stationery,  post- 
age, telephone  and  telegram  charges. 

T[  33.       Debit  the  receiver :  credit  the   giver. 

H  157.       Debit  sales  account  for  costs :  credit  for  returns. 

^  266.       Debit  selling  expense  accounts  for  costs :  credit  for  returns. 

^[  268c.  Debit  selling  expense  accounts  for  outward  freight,  express  and 
dray  age  charges. 

Tf  391b.  Debit  real  estate  expense  and  income  accounts  for  taxes,  insurance, 
interest,  and  other  similar  charges  on  the  property  for  the  fiscal  period. 

^  334b.  Credit  insurance  account  for  the  proportion  of  the  expired  premium 
value  of  insurance  which  has  expired  in  the  month  or  fiscal  period  covered  by  the 
trial  balance  or  by  the  profit  and  loss  statement  in  which  it  is  to  appear. 


INDEX 


Accounting,  Cost,  defined 202 

Advantages  of  a  Cost  System 209 

Board  of  Directors,  defined 194 

Burden,  defined  — .'....  204 

Burden,  Distribution  of 213 

Capital  Stock. 193 

Corporations 193 

Corporation  Accounts _. 196 

Corporations  and  Partnerships,   Differ- 

encebetween ' 195 

Cost  Accounting 202 

Cost,  Elements  of 200 

Cost  Formula 206,  208 

Cost  Method  of  Manufacturing  Accounts  223 

Cost  of  Production,  defined 200,  206 

Cost  of  Sales  Account 234 

Cost  Records,  etc.,  Forms  of 254 

Cost  System,  Advantages  of 209 

Department  Method  of    Manufacturing 

Accounts 221 

Difference    between    Partnerships    and 

Corporations 195 

Distribution  of  Indirect  Expenses 213 

Distribution  of  Manufacturing  Expenses  213 
Distribution  of  Burden 213 

Elements  of  Cost 200 

Expenses,  Manufacturing 228 

Factors  Expense  Account 228 

Factory  Expenses 201,  204,  231 

Factory  Expense  Account 232 

Final  Trial  Balance. 241,  246 

Finished  Goods  Account 233,  250 

Finished  Goods  Journal 235 

Forms  of  Cost  Records,  etc 254 

Formula  for  Manufacturing  Statement.  240 

Indirect  Expenses,  Distribution  of 213 

Invoice  Journal .  234 


Labor 201 

Labor  Account 227 

Ledger,  Materials 225 

Ledger,  Stock 225 

Ledger,  Stores 225 

Manufacturing  Accounts 200,  230 

Manufacturing  Accounts,  Cost  Method. .  223 
Manufacturing  Accounts,  Department 

Method 221 

Manufacturing  Expenses 201,  228 

Manufacturing  Expenses,  Distribution  of  213 
Manufacturing  Expense  Account. .  .  228,  249 
Manufacturing  Expense  Estimate  Book.  235 

Manufacturing  Statements 239-253 

Manufacturing  Statement,  Formula  for.  240 

Materials 201 

Materials  Account 225,  248 

Materials  in  Process  Account 226,  249 

Materials  Ledger 225 

Overhead  Expenses,  defined 205 

Overhead  Expenses,  Distribution  of. ...  213 

Partnerships  and  Corporations,   Differ- 
ence between 195 

Pay  Roll 222,  227 

President,  defined 194 

Production  Cost 200-206 

Production  Factor  or  Center 216 

Productive  Labor  Account.  .......   227,  249 

Profit  and  Loss  Statements 214,  245 

Purchases   Journal 234 

Requisition   Journal 235 

Secretary,  defined 194 

Shop  expenses 201 

Statements 239 

Manufacturing 239-253 

Profit  and  Loss 244 

Resources  and  Liabilities > 246 

Trading 244 

Trading  and  Profit  and  Loss 252 


277 


278  INDEX 

Stockholders 194      Transfer  Outward  Journal I 235 

Stock  Certificate 194      Treasurer,  defined 194 

Stock  Deliveries  Journal 235      Treasury  Stock,  defined 194 

Stock  Ledger 225      Treasury  Stock  Account 197 

Stores  Ledger 225      Trial  Balances 241,  246 

Subscription  Account 197 

Voucher  System 257 

Time  Cards  or  Tickets 222,  227 

Trading  Statements 244      Wage  Systems 212 

Transfer  Inward  Journal 235      Work  in  Process,  defined 226 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

Los  Angeles 
This  book  is  DUE  on  the  last  date  stamped  below. 


FEB27 


Form  L9-32m-8,'58(5876s4)444 


Library 

Graduate  School  of  Business  Administration 
University  of  California 

y       ji   r+f*  "I  f\f,   *~>  A     r^oH-i-P^-\  v»n  n  o 


UCLA-GSM  Library 

HF5635R79bo 


L  005  041  238  6 


SOUTHERN  BRANCH, 

UNIVERSITY  OF  CALIFORNIA, 

LIBRARY, 

UOS  ANGELES.  CALIF. 


